MASTER 

NEGATIVE 
NO.  95-82420- 12 


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Author: 


Untermyer,  Samuel 


Title: 


Argument  before  U.S. 
Senate  Committee  on 

Place: 

[New  York] 

Date: 

[1914] 


9S''S^H7o-lZ- 


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MASTER   NEGATIVE   i 


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BIJSfMESS 

785 
Un8 


Untermyer,  Samuel,  1858**1940. 

Argument  before  U.S,  senate  committee  on 
banking  and  currency  in  support  of  Senate  bill 
no*3895  to  regulate  the  use  of  the  mails,  tele- 
graph and  telephone  by  stock  exchanges,  Maroh 
16th,  1914...  Nevr  York,  1914. 

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1-  CUFFENCY  IN  ?UFP'^f-T.  3F  sm"   BILL  ND"  359. 
^^  REGUL.-TE  THE  USE  OF  THE  M.-.ILS,  TELEG:  .' 

P&muel  Untermyer 


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ARGUMENT 


BEFORE 


U.   S.  SENATE  COMMITTEE  ON  BANKING  AND 
CURRENCY    IN    SUPPORT    OF    SENATE 
BILL  No.  3895  TO  REGULATE  THE 
USE    OF    THE    MAILS,    TELE- 
GRAPH   AND   TELEPHONE 
BY  STOCK  EXCHANGES 


March  16th.  1914. 


By 
Samuel  Untermyer 


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Mb.  Chairman  and  Gentlemen  of  the  Committee: 

The  learned  Counsel  for  the  New  York  Stock  Exchange 
has  argued  before  you  and  has  presented  an  elaborate  brief 
against  the  constitutionality  of  this  Bill.  A  similar  argu- 
ment was  presented  by  him  to  the  Pujo  Committee. 

If  in  the  light  of  recent  adjudications,  the  legal  proposi- 
tions for  which  he  has  assumed  responsibility  had  been  ad- 
vanced by  one  less  experienced  and  distinguished  one  would 
be  disposed  to  characterize  them  as  trivial  but  I  feel  that  any 
proposition  advanced  by  him  is  entitled  to  serious  and  respect- 
ful consideration.  They  are  fully  discussed  and  I  think  con- 
clusively answered  by  the  argument  and  citations  that 
will  be  found  at  pp.  119-124  of  the  Eeport  of  the  Pujo 
Committee  and  by  a  supplemental  memorandum  which  is 
herewith  submitted.  I  take  issue  with  the  assertion  that 
the  proposed  Bill  contains  provisions  that  are  intended  by  in- 
direction to  regulate  the  internal  affairs  of  the  Exchange  and 
of  the  corporations  whose  shares  are  listed.  There  is  not  a 
requirement  of  this  Bill  that  is  not  necessary  to  and  does 
not  bear  directly  upon  safeguarding  the  mails  against  being 
used  as  an  agency  for  the  distribution  of  manipulated  quota- 
tions of  prices  of  securities  and  other  fraudulent  purposes. 

The  Bill  carefully  refrains  from  intruding  into  the  in- 
ternal management  or  affairs  of  the  Exchange  or  from  writ- 
ing into  its  charter  anything  that  does  not  strictly  concern 
the  integrity  of  the  transactions  that  are  to  be  carried  through 
the  mails.  All  else  is  left  to  the  jurisdiction  of  the  States, 
where  it  rightfully  belongs. 

The  purpose  and  effect  of  this  Bill  have  been  grossly  mis- 
represented and  misunderstood,  as  will  hereafter  appear.  It 
has  been  said  that  it  involves  a  censorship  of  the  press 
and  that  it  interferes  with  the  liberty  of  the  press.  It 
has  about  the  same  relation  to  the  liberties  or  censorship 
of  the  press  as  chalk  has  to  cheese.  It  is  a  purely  con- 
structive measure.  It  does  not  seek  to  punish  for  the  mis- 
deeds of  the  past  but  to  prevent  and  punish  their  recurrence 
in  the  future.  It  is  framed  on  the  theory  that  the  Stock  Ex- 
change is  an  integral  and  perhaps  the  most  important  part 
of  our  National  and  International  financial  system  and  that 
if  the  abuses  such  as  the  manipulation  of  prices  that  now 
characterize  its  operations  can  be  eliminated  its  usefulness 
may  be  greatly  enlarged  and  it  may  be  made  the  great  public 
security  market  of  the  world  to  which  investors  will  resort 


with  a  sense  of  security  in  the  integrity  of  the  transactions 
there  conducted. 

It  is  believed  that  by  requiring  full  publicity  of  the  facts 
concerning  corporations  in  the  securities  of  which  it  is  per- 
mitted to  deal  and  by  banishing  and  rendering  hereafter  im- 
possible the  illegitimate  transactions  that  now  disgrace  it 
and  that  have  destroyed  confidence,  the  investing  public  will 
be  attracted  and  a  vast  amount  of  legitimate  investment  busi- 
ness will  result  which  will  mean  for  it  the  dawn  of  a  new  era 
of  prosperity. 

Whilst  the  ex-parte  statements  and  the  arguments  of 
Counsel  before  your  Committee  have  served  only  to  empha- 
size the  weight  of  the  sworn  evidence  on  which  the  House 
sub-Committee  of  the  Committee  on  Banking  and  Currency 
(the  Pujo  Committee)  acted  in  recommending  the  Bill  that  is 
now  before  you,  the  discussion  has  been  valuable  in  clarifying 
and  simplifying  the  issues  with  which  you  are  called  upon  to 

deal. 

As  the  result  of  this  discussion  we  are  confirmed  in  the  view 
that  Federal  supervision  of  the  quotations  that  are  listed  and 
dealt  in  on  our  Stock  Exchanges  is  essential  to  the  public 
protection.  The  only  open  question  is  as  to  how  that  protec- 
tion is  to  be  best  accomplished. 

The  champions  of  the  Bill  insist  that  it  can  be  effectively 
done  only  through  excluding  from  the  use  of  the  mails,  tele- 
phone and  telegraph  all  quotations  on  public  markets  of  se- 
curities that  are  not  subjected  to  suitable  State  supervision 
through  incorporation  and  under  charter  and  by-laws  that  in 
the  judgment  of  Congress  will  prevent  the  mails  and  the 
agencies  of  interstate  commerce  from  being  used  as  mediums 
for  the  distribution  of  fraudulent  and  manipulated  quotations. 
To  that  end  and  only  for  that  purpose  we  insist  that  the  Fost- 
master-General  should  be  given  the  power— not  to  pass  up- 
on the  sufficiency  of  the  State  charter  or  by-laws  of  the 
Exchange,  as  the  opponents  of  the  Bill  would  have  you  be- 
lieve, for  there  is  no  such  provision— but  (1)  to  perform 
the  formal  duty  of  determining  whether  the  charter  and 
by-laws  contain  the  safeguards  that  are  prescribed  by  the 
Bill  against  the  abuse  of  the  use  of  the  mails,  telegraph  and 
telephone,  (2)  to  ascertain  whether  these  statutory  require- 
ments are  being  enforced  and  (3)  to  examine  the  books  of  the 
members  containing  entries  of  their  transactions  on  the  Ex- 


8 


change  (not  their  other  business)  as  the  only  possible  means 
of  detecting  such  misuse,  so  that  if  such  violations  exist  they 
may  be  dealt  with  by  the  Courts  upon  the  complaint  of  the 
Department  of  Justice. 

It  is  only  where  a  public  security  market  is  not  incorpo- 
rated or  where  if  incorporated  its  charter  does  not  contain 
the  prescribed  provisions  or  where  the  provisions  are  not 
being  enforced  that  the  Postmaster-General  can  deny  the  use 
of  the  mails  to  any  letter  or  publication  containing  its  quota- 
tions. His  are  ministerial  acts  in  these  respects  and  should 
be  made  subject  to  review  by  the  Courts. 

So,  too,  in  his  examination  of  the  books  of  the  members  of 
the  Exchange,  if  as  the  result  of  such  examination  he  finds 
that  there  have  been  quotations  of  **wash  sales,"  ** matched 
orders''  or  fictitious  or  manipulated  transactions  foisted  upon 
the  public  as  genuine  transactions,  he  cannot  stop  their  trans- 
mission or  interfere  with  the  operations  of  the  Exchange  on 
that  account  or  punish  anyone  concerned  in  the  fraud  if  the 
requirements  of  the  Statute  are  being  met  by  the  Exchange. 
All  he  can  do  in  that  event  is  to  furnish  the  evidence  thus 
secured  as  a  basis  for  prosecuting  the  guilty  parties.  The 
Exchange  is  not  thereby  interfered  with  in  its  right  to  con- 
tinue the  use  of  the  mails  for  its  quotations.  So  long  as  its 
charter  is  in  proper  form  and  its  charter  provisions  are  be- 
ing observed  its  use  of  the  mails  is  secure.  The  guilty  party 
alone  is  reached  and  his  punishment  made  possible. 

By  what  stretch  of  construction  such  a  scheme  of  regu- 
lation of  the  use  of  the  mails  can  be  contorted  into  a  censor- 
ship of  the  press  or  an  interference  with  the  freedom  of  the 
press  or  as  ** Russianizing  the  press,''  it  is  difficult  to  under- 
stand. And  yet  the  cry  has  been  ingeniously  raised  and 
thoughtlessly  repeated  throughout  the  length  and  breadth  of 
the  land  by  a  press  that  is  at  the  moment  hyper-sensitive  of 
its  privileges,  that  in  some  way  as  yet  unexplained  this  Bill 
would  furnish  an  entering  wedge  for  curtailing  the  liberties 
of  the  press. 

Before  disposing  once  and  for  all  of  this  baseless  con- 
tention, which  is  cleverly  put  forward  by  the  Exchange  as 
a  bid  for  the  support  of  the  press  in  defeating  this  Bill,  per- 
mit me  to  say  by  way  of  parenthesis  that  the  power  and 
momentum  of  the  press  are  increasing  at  such  a  rate  that 
the  danger  is  not  so  much  that  Congress  will  ever  **  Russian- 


ize  the  press''  as  that  the  press  may  **Eussianize"  the 
people. 

The  liberties  of  the  press  are  in  no  peril  in  this  press- 
ridden,  press-governed  country  of  ours,  where  we  have  no 
libel  laws  worthy  of  the  name  and  where  public  officials  are 
terrorized,  reputations  are  slaughtered  without  redress  and 
governmental  policies  are  dictated  by  the  newspapers.  Not- 
withstanding these  excesses — which  will  doubtless  be  cor- 
rected or  will  correct  themselves  in  time — the  liberty  of  our 
press  is  one  of  our  priceless  possessions  which  no  patriotic 
citizen  would  care  to  see  abridged,  even  though  it  is  permitted 
under  our  lax  administration  of  the  law  at  times  to  lapse 
into  unrestrained  license  and  to  become  a  serious  handicap 
to  the  administration  of  justice.  These  temporary  evils  are 
negligible  as  compared  with  the  peril  of  the  loss  of  a  free 
press. 

This  Bill  has  no  possible  relation  to  the  press  or  its  lib- 
erties. True,  no  publication  that  contains  the  quotations  of 
the  securities  of  an  unincorporated  Stock  Exchange  can  have 
the  use  of  the  mails;  all  that  means  is  that  the  newspapers 
shall  carry  the  quotations  of  only  such  public  security  mar- 
kets as  conform  to  the  requirements  that  Congress  considers 
essential  to  prevent  the  dissemination  of  fictitious  or  manip- 
ulated transactions  by  which  the  public  will  be  misled.  The 
press  does  not  and  cannot  assume  any  such  obligation.  It 
knows  nothing  of  the  genuineness  of  the  quotations  that  it 
receives  from  the  Western  Union  Telegraph  Company  and 
which  the  latter  in  turn  takes  from  the  officials  of  the  Ex- 
change. The  newspapers  are  quite  as  much  interested  as  any 
other  part  of  the  community  in  the  stability  of  the  news  and 
in  preventing  the  dissemination  of  frauds  of  the  character 
sought  to  be  reached  by  this  Bill.  The  same  prohibition  ap- 
plies to  the  use  of  the  telegraph  and  the  telephone  and  to  the 
dissemination  of  the  information  through  letters  or  by  any 
other  agency  of  interstate  commerce. 

It  might  as  well  be  said  that  the  exclusion  of  pictures  or 
literature  contained  in  newspapers  that  the  Postmaster  be- 
lieves to  be  obscene,  or  of  offers  of  fraudulent  stocks  by  ad- 
vertisements or  of  other  enterprises  of  doubtful  legitimacy  is 
an  interference  with  the  liberty  of  the  press,  for  in  those  cases 
the  Postmaster-General  has  absolute  authority  to  determine 
whether  the  picture  or  literature  or  advertisement  is  proper. 


Here  he  has  no  such  power.  If  the  Exchange  has  been  incor- 
porated and  its  charter  contains  the  requirements  that  Con- 
gress considers  necessary  to  assure  the  integrity  of  the  quo- 
tations he  cannot  exclude  them  unless  the  requirements  are 
being  violated,  and  his  action  should  be  made  subject  to 
review,  which  is  not  true  of  any  of  the  existing  regulations 
which  I  have  instanced. 

If  a  newspaper  publishes  paid  matter  in  the  form  of 
**news"  and  fails  so  to  label  it,  the  Postmaster-General  may 
refuse  the  use  of  the  mails  to  the  paper  as  second-class  mat- 
ter, which  he  cannot  do  under  this  Bill,  even  if  he  knows  the 
quotations  to  be  fictitious  or  manipulated-  If  a  deceptive  ad- 
vertisement is  contained  in  a  newspaper  the  Postmaster- 
General  may  likewise  prohibit  it  the  use  of  the  mails.  He 
may  absolutely  exclude  from  the  mails  matter  though  not 
fraudulent  and  not  relating  to  gambling  or  unlawful  trans- 
actions which  he  believes  not  to  constitute  legitimate  enter- 
prise, as  was  held  in 

Public  Clearing  House  v.  Coyne,  194  U.  8,  497. 

In  all  these  cases  and  in  a  variety  of  others  that  are  cited 
in  the  discussion  of  this  Bill  at  pp.  119-128  of  the  Pujo  Report 
he  is  the  sole  judge.  Under  this  Bill  he  has  none  of  these 
powers. 

Another  useful  purpose  that  has  been  accomplished  by 
the  discussion  before  your  Committee  has  been  to  force  the 
virtual  admission  by  the  opponents  of  this  Bill  of  the  neces- 
sity for  some  sort  of  Federal  regulation.  They  object,  how- 
ever, to  the  result  being  accomplished  through  State  incor- 
poration or  through  the  supervision  of  the  Postmaster-Gen- 
eral, but  fail  to  point  out  any  effective  alternative.  Coun- 
sel, speaking  for  the  New  York  Stock  Exchange,  suggests 
that  a  Bill  similar  to  that  under  which  lotteries  were 
suppressed,  that  would  deny  the  use  of  the  mails  and  tele- 
graph for  the  distribution  of  fictitious  and  unlawful  trans- 
actions would  answer  the  purpose.  To  me  it  is  manifest  that 
it  would  be  about  as  valuable  as  a  blank  piece  of  paper.  Any- 
body can  detect  a  lottery  ticket  but  counsel  fails  to  ex- 
plain how  fraudulent  or  fictitious  or  manipulated  quotations 
are  to  be  detected  unless  some  machinery  is  to  be  supplied 
for  the  purpose  of  safeguarding  the  mails  against  being  used 


6 

for  their  dissemination.  The  Boston  Chamber  of  Commerce 
acting,  as  I  understand,  with  the  Boston  Stock  Exchange  pre- 
sents a  Bill  which  will  hereafter  be  more  fully  discussed, 
proposing  Federal  supervision  but  without  incorporation  and 
which  would  perpetuate  the  chief  evil  sought  to  be  abated  by 
this  Bill, 

By  the  terms  of  this  Bill  Congress  will  be  satisfied  to  have 
the  States  in  which  these  Exchanges  are  located  place  them 
under    State    supervision,    provided    their    charters     con- 
tain   certain    prescribed    provisions    safeguarding    against 
fraud  and  manipulation  the  quotations  that  require  the  use 
of  the  mails  and  telegraph  and  anything  else  that  the  State 
may  see  fit  to  write  into  them  and  which  Congress  does  not 
undertake  to  dictate  or  suggest.    In  response  to  this  mod- 
erate proposal  it  is  said  that  it  is  an  attempt  on  the  part  of 
Congress  to  dictate  the  form  of  the  State  charter,  which  is 
precisely  what  the  Bill  painstakingly  refrains  from  doing  ex- 
cept in  the  single  particular  in  which  the  Federal  Govern- 
ment is  directly  concerned.    When  it  is  suggested  that  the  only 
possible  means  of  ascertaining  whether  quotations  are  ficti- 
tious^ or  being  manipulated  is   to  give  to  the  Postmaster 
the  right  to  inspect  the  books  of  the  members  for  that  pur- 
pose, we  are  told  that  no  responsible  broker  will  tolerate 
any  such  inquisitorial  procedure  and  that  none  but  clerks 
would  thereafter  be  members  of  the  Exchange  if  that  neces- 
sary and  only  means  of  discovering  violations  of  the  law 
were  adopted.      The  opponents  of  the  Bill  significantly  re- 
frain from  enlightening  us  as  to  how  there  could  ever  be  any 
effective  regulation  without  this  privilege. 

The  right  to  secrecy  from  their  point  of  view  is  not  invaded 
when  the  Bo^rd  of  Governors  of  the  Exchange,  consisting 
of  forty  of  the  competitors  of  a  member  are  entitled  and 
are  constantly  accorded  the  right  to  investigate  these  trans- 
actions ;  but  it  is  intolerable  when  for  the  purpose  of  discover- 
ing fraud  a  Government  official  is  to  be  entrusted  with  a 
like  power  as  a  condition  of  allowing  a  member  to  use  the 
Government  facilities. 

The  members,  besides  using  these  public  facilities,  have 
their  private  telegraph  and  telephone  wires  between  New 
York  City  and  the  principal  Cities  of  the  United  States, 
through  which  orders  to  purchase  and  sell  securities  come 
to  them  from  all  parts  of  the  country,  based  on  the  quotations 


that  are  carried  through  the  mails  and  over  the  telephone  and 
telegraph.  They  require  these  facilities.  They  are  admitted- 
ly essential  to  the  conduct  of  the  business  of  its  members  but 
they  resent  the  proposal  that  the  Government  should  have 
any  way  of  ascertaining  whether  they  are  being  used  to  mis- 
lead the  public. 

Whilst  the  Exchange  is  suggesting  a  law  similar  to  the  anti- 
Lottery  Bill  as  the  limit  of  Federal  regulation,  other  oppo- 
nents and  many  well-meaning  but  uninformed  friends  of 
regulation  are  urging  that  the  Bureau  of  Corporations 
or  the  Department  of  Conamerce  or  the  proposed  new  Trade 
Commission  be  entrusted  with  the  duty  of  regulating  Stock 
Exchanges  as  though  this  were  a  Bill  to  regulate  the  internal 
affairs  of  Stock  Exchanges,  which  it  is  not.  Its  only  purpose 
is  to  prescribe  the  conditions  on  which  such  Exchanges  may 
use  the  mails  and  telegraph  for  the  distribution  of  their  quo- 
tations beyond  State  lines.  So  long  as  they  do  not  require 
these  privileges  the  Bill  does  not  apply  to  them.  Why  the 
Secretary  of  Commerce  or  the  Commissioner  of  Corporations 
would  be  as  well  adapted  or  more  acceptable  than  the  Post- 
master-General for  the  carrying  out  of  the  declared  objects 
is  not  explained  except  by  the  fact  that  the  Exchange  is  seek- 
ing to  take  advantage  of  a  prejudice  against  delegating  any 
additional  powers  to  the  Postmaster-General.  That  preju- 
dice is  in  some  respects  well-founded  for  he  has  many  ar- 
bitrary despotic  powers,  none  of  which  are  subject  to  judi- 
cial review.  But  it  has  no  application  to  this  case  where  the 
regulation  has  to  do  distinctly  with  the  use  of  the  mails  and  the 
Postmaster-General  is  accordingly  manifestly  the  only  logical 
and  legitimate  official  in  whom  the  authority  should  be  vest- 
ed and  it  should  be  subject  to  review. 

The  position  of  the  Stock  Exchange  is  inconsistent.  It 
insists  and  has  submitted  an  elaborate  argument  to  prove 
that  the  distribution  of  quotations  is  not  interstate  com- 
merce— to  which,  by  the  way,  we  do  not  agree — and  yet 
suggests  as  a  remedy  legislation  on  the  lines  of  the  Anti- 
Lottery  Bills.  The  Exchange,  as  before  stated,  sells  its 
quotations  for  distribution  throughout  the  country  and  in 
foreign  countries  to  the  Western  Union  Telegraph  Com- 
pany, but  by  the  contract  between  the  Exchange  and  the 
Telegraph  Company  they  continue  under  the  control  of  the 
Exchange  wherever  they  go. 


8 

If,  as  the  Supreme  Court  has  held,  a  lottery  ticket  and  the 
letters  of  a  correspondence  school  and  a  variety  of  kindred 
subjects  constitute  interstate  commerce,  it  is  difficult  to  un- 
derstand why  these  quotations  do  not  come  plainly  within 
the  decisions.  This  phase  of  the  subject  is  also  fully  dis- 
cussed  on  pages  119-128  of  the  Report  of  the  Pujo  Committee, 
where  the  conclusion  is  reached  that  Congress  has  the  power 
to  control  the  business  of  these  Exchanges  and  of  their  mem- 
bers as  being  engaged  in  interstate  commerce.  But  this  Bill 
is  not  framed  on  that  theory  for  the  reason  that  the  control 
over  the  quotations  is  more  legitimately  dealt  with  through 
control  over  the  use  of  the  mails. 

Beyond  these  considerations  there  is  however  the  further 
unanswerable  reason  why  the  Federal  regulation  of  these 
quotations,    which    seems    at    last    to    be    recognized    as 
essential,    cannot    be    accomplished    through    the    Depart- 
ment  of   Commerce,   the   Bureau   of   Corporations    or   the 
proposed  Trade   Commission,  that  the  quotations  are  not 
in    all    instances    those    of    corporations    engaged    in    in- 
terstate    business.       Many     of     the     most     important     of 
the    securities    dealt    in    on    the    New    York    Stock    Ex- 
change   and    on    other    Exchanges    are    those    of    intra- 
state public  service  corporations  and  other  intrastate  com- 
panies.   Among  the  securities  of  that  character  listed  on  the 
New   York  Exchange   there   occur   to   one   at  the   moment 
such  as  the  Interborough-Metropolitan  Company  and  Brook- 
lyn Rapid  Transit  Company,  which  together  control  the  Sub- 
way, Elevated  and  surface  lines  of  Greater  New  York  and 
will  have  approximately  $500,000,000  of  securities  listed ;  the 
Consolidated  Gas  Company,  which  controls  the  gas  and  elec- 
tric lighting  systems  of  Greater  New  York  and  is  represented 
by  a  vast  amount  of  securities;  the  telephone  companies  in 
the  various  states  whose  securities  are  dealt  in  all  over  the 
country;  innumerable  railroads  that  are  within  the  bound- 
aries of  the  different  Slates ;  mining  corporations  with  hun- 
dreds of  millions  of  listed  capital  that  operate  within  the 
States  where  their  mines  are  located  and  sell  their  product 
at  the  mines  so  that  they  do  no  interstate  business   and   an 
infinite  variety  of  other  great  intra-state  corporate  enterprises. 
There  are  billions  of  dollars  of  securities  of  intrastate  cor- 
porations the  securities  of  which  have  a  broad  international 
market  over  whose  operations  this  Federal  Trade  Commis- 


sion (which,  by  the  way,  has  not  yet  been  created)  would 
have  no  control. 

When  we  come  to  analyze  these  various  propositions  it 
seems  incongruous  that  in  enacting  laws  to  protect  the  public 
against  being  victimized  by  the  circulation  through  the  mails 
of  fictitious  and  manipulated  quotations  of  prices  of  securi- 
ties, Congress  should  ignore  the  Department  through  which 
such  protection  can  be  best  accomplished  and  should  consider 
entrusting  the  duty  to  another  Department  having  no  logical 
relation  to  the  subject,  merely  to  satisfy  a  prejudice  against 
entrusting  to  that  "Department  the  duties  for  which  it  was 

organized  and  which  it  is  best  equipped  to  perform. 

• 

The  very  astute  and  resourceful  gentlemen  who  are  try- 
ing to  defeat  this  legislation  by  the  familiar  device  of  suggest- 
ing ways  of  not  doing  the  things  that  this  Bill  is  intended  to 
accomplish,  charge  that  this  is  an  effort  by  indirection  and 
through  the  medium  of  the  Post  Office  Department  to  secure 
publicity  and  uniform  regulation  of  the  affairs  of  corporations. 
In  proof  of  that  claim  they  refer  to  subsections  (a)  (b)  and  (i) 
of  Section  1  of  the  Bill  prescribing  the  requirements  of  the 
charters  of  Stock  Exchanges  as  to  the  disclosures  that  must  be 
made  by  corporations  whose  securities  are  to  be  listed. 

They  profess  to  applaud  that  purpose  but  say  that  every- 
thing attempted  in  that  direction  can  be  more  legitimate- 
ly accomplished  by  requiring  these  disclosures  to  be 
made  to  the  Bureau  of  Corporations  or  the  Interstate  Com- 
merce Commission  or  the  new  Trade  Commission.  In  pre- 
senting that  argument  they  entirely  overlook  the  facts  to  which 
we  have  adverted  (1)  that  these  conditions  are  imposed  as 
necessary  to  secure  the  integrity  of  the  quotations  for  the  dis- 
tribution of  which  the  mail  facilities  are  sought  and  for  no 
other  purpose;  (2)  that  none  of  these  Departments  has  juris- 
diction over  the  use  of  the  mails  or  is  in  any  way  responsible 
for  the  abuse  of  that  privilege,  and  (3)  that  the  quotations 
that  are  to  be  distributed  may  be,  unless  regulated,  employed 
to  mislead  the  public. 

The  prevention  and  punishment  of  manipulation  are  the 
chief  aims  of  the  Bill, 

No  matter  how  complete  may  be  the  disclosures 
made    of    the    affairs    of    a    corporation    the    public    may 


10 


be  preyed  upon  if  every  unscrupulous  stock  operator 
or  combination  of  speculators  and  every  pool  or  syndicate 
may  freely  manipulate  the  securities  of  that  corporation  and 
exploit  the  public  through  the  unrestrained  use  of  the  mails 
and  telegraph.  The  public  must  he  protected  at  the  crucial 
point  at  which  the  securities  are  being  marketed  if  there  is 
to  be  any  protection  anywhere.  The  argument  now  advanced 
that  the  protection  should  be  applied  in  the  issue  of  the  secur- 
ities by  the  corporation  is  a  clever  effort  to  obscure  and  shift 
the  required  regulation  from  that  of  safeguarding  against  the 
manipulation  of  prices  of  securities  that  are  already  protect- 
ed by  the  requirement  of  publicity  to  that  of  the  control  of 
bond  and  stock  issues. 

It  is  rarely  if  ever  that  the  corporation  manipulates  or 
deals  in  its  own  securities  or  that  it  is  done  on  behalf  of 
the  corporation.  The  operation  is  frequently  conducted  with- 
out its  knowledge  or  connivance,  generally  by  or  in  conjunc- 
tion with  insiders  but  often  by  outsiders. 

^  The  wholesome  requirements  for  publicity  contained  in 
this  Bill  furnish  one  of  the  two  conditions  necessary  to  insure 
the  integrity  of  dealings  in  the  stock.  The  other  condition 
of  equal  importance  is  that  the  market  for  the  stock  shall  be 
open  and  honest,  free  from  manipulated  prices.  Neither  con- 
dition can  be  met  by  any  of  the  makeshifts  that  have  been 
proposed  or  by  any  means  other  than  that  outlined  in  the 
Bill.     None  has  yet  been  suggested. 

The  proposed  Bill  submitted  as  the  result  of  collaboration 
between  the  Boston  Chamber  of  Commerce  and  the  Boston 
Stock  Exchange  lacks  every  essential  of  effective  control  and 
would  leave  the  situation  worse  than  it  is  at  present.  It  rep- 
resents an  attempt  to  appease  the  public  demand  whilst  ac- 
complishing nothing.  It  significantly  omits  to  condemn 
manipulation,  which  is  the  chief  evil  to  be  reached,  by  cover- 
ing only  manipulation  by  means  of  ''fictitious  purchases  and 
sales/'  **wash  sales''  or  ^'matched  orders."  Manipulation  is 
not  accomplished  by  any  of  these  means  as  will  be  hereafter 
shown.  The  only  penalty  prescribed  is  expulsion  from  the 
Exchange.  It  should  be  made  a  crime.  No  means  are  pro- 
vided for  discovering  violations.  It  is  the  most  transparent 
''make  believe."  Far  better  no  legislation  on  the  subject 
until  something  really  effective  can  be  secured.  Even  in  the 
requirements  for  listing  the  most  important  safeguards  are 


11 


omitted,  such  as  the  exclusion  from  listing  of  the  securities 
of  corporations  whose  officers  and  directors  are  not  prohibit- 
ed from  secretly  speculating  in  its  securities.  There  is  not 
a  provision  in  the  proposed  Boston  Bill  that  is  not  now  em- 
bodied in  the  rules  of  the  Exchanges  in  which  there  now  exist 
the  evils  that  are  sought  to  be  corrected.  It  is  a  ** blind" 
under  cover  of  which  to  defeat  effective  regulation. 

The  following  are  some  of  the  chief  contributions  in  the 
way  of  irresponsible  assertion  without  proof  that  have  been 
added  to  the  testimony  adduced  by  the  Pujo  Committee,  dur- 
ing the  course  of  the  discussion  before  your  Committee : 

(a)  The  illuminating  argument  of  Mr.  Edward  D.  Page, 
who  was  one  of  the  members  of  the  Hughes  Commission  of 
1909  on  whose  Eeport  the  Stock  Exchange  strangely  relies 
and  of  which  we  will  hereafter  have  more  to  say,  in  which 
Mr.  Page  learnedly  descants  upon  and  champions  the  virtues 
of  **  watered  stock"  as  a  positive  boon  to  the  investing  public 
and  in  which  he  deprecates  the  ignorant  prejudice  against  it 
that  seems  to  have  taken  possession  of  the  ill-informed  legis- 
lative mind. 

(b)  Mr.  Van  Antwerp's  surprising  nonr-sequiter  that  the 
effect  of  any  legislation  by  Congress  safeguarding  the  people 
against  the  frauds  that  are  being  practiced  upon  them 
through  manipulated  transactions  will  be  to  transfer  the 
business  to  the  bucket-shops  (p.  153). 

We  had  not  supposed  and  do  not  believe  that  of  late 
years  at  least  there  is  any  such  close  relation  between  the 
character  of  the  legitimate  business  of  the  stock  broker  and 
the  dishonest  occupation  of  the  bucket-shop.  Mr.  Van  Ant- 
werp's ''argument"  is  an  insult  to  the  Exchange.  It  implies 
that  its  dealings  are  largely  gambling  and  that  they  involve 
nothing  more  than  a  settlement  of  differences. 

(c)  Mr.  Van  Antwerp's  further  non-sequiter  that  such  reg- 
ulation would  transfer  the  business  of  buying  and  selling 
securities  from  the  public  market  of  the  Exchange  to  the 
private  bankers. 

The  two  methods  of  dealing  in  securities  are  as  far  apart 
as  the  poles.  They  always  have  and  always  will  co-exist  and 
complement  one  another,  just  as  real  property  will  always 
be  sold  privately  and  at  public  auction,  one  being  regulated 
by  private  barter  and  the  other  by  public  competition. 


i-^ 


M' 


12 


(d)  Another  instructive  point  of  view  advanced  by  Mr. 
Van  Antwerp  as  to  the  effect  of  protecting  the  integrity  of 
quotations  through  regulation  is  that  the  speculative  business 
would  go  to  the  London,  Montreal  and  Toronto  Stock  Ex- 
changes. As  this  Bill  does  not  interfere  with  speculation  we 
have  here  another  argument  apropos  of  nothing.  If  Mr.  Van 
Antwerp  means  that  the  speculation  that  is  induced  by 
manipulated  prices  would  go  to  foreign  exchanges  I  can  only 
say  that  the  sooner  that  form  of  activity  is  transferred  to 
foreign  shores  the  better  it  will  be  for  our  people. 

Some  Continental  countries  still  maintain  Government  lot- 
teries. Unlike  sales  of  stock  that  are  induced  by  the  excite- 
ment and  apparent  activity  induced  by  manipulation,  these 
lotteries  are  doubtless  honestly  conducted.  They  are  not 
accompanied  by  false  rumors  of  impending  ** deals,''  new  dis- 
coveries, increased  dividends  and  the  many  other  devices  that 
have  become  so  familiar  but  the  source  of  which  can  never 
be  traced.  It  is  possible  that  many  of  our  citizens  patronize 
those  lotteries  because  they  are  unable  to  buy  lottery  tickets 
in  this  country  but  that  furnishes  no  reason  why  our  Govern- 
ment should  reopen  the  business  of  allowing  lottery  tickets 
to  be  sold  through  the  use  of  the  mails, 

Mr.  Van  Antwerp  in  his  excess  of  zeal  to  perpetuate 
the  practice  of  manipulation  on  the  threat  that  unless  the 
Federal  Government  continues  to  lend  its  aid  through 
the  use  of  the  mails  it  will  be  conducted  through  foreign  ex- 
changes, fails  to  take  into  account  the  fact  that  the  quota- 
tions of  those  Exchanges  may  be  equally  barred  from  the 
mails  as  the  lottery  tickets  of  foreign  Governments  are  now 
barred  unless  they  conform  to  the  requirements  that  are 
imposed  upon  our  own  Exchanges, 

I  venture  to  say  that  your  Committee  has  rarely  had 
submitted  to  it  anything  quite  so  unsubstantial  in  the  way  of 
** argument''  as  is  this  plea  of  Mr.  Van  Antwerp. 

The  purpose  of  this  Bill  is  to  assure  and  protect  the  hon- 
esty of  the  public  market  against  the  frauds  that  now  char- 
acterize it  in  the  form  of  manipulation  which  the  Stock  Ex- 
change still  seeks  by  all  manner  of  specious  arguments  to  de- 
fend. Mr.  Van  Antwerp  calls  the  form  of  mock  auction 
known  as  manipulation  ''stabilizing  the  market"  (p.  121). 
Other  defenders  of  the  system  refer  to  it  as  ''creating  a 
market"  or  "creating  activity".    Mr.  Milburn  apparently  is 


\ 


13 


uncertain  whether  to  defend  or  condemn  it.  At  one  point  he 
argues  that  there  is  very  little  of  it  and  that  the  Exchange 
seeks  to  prevent  it,  whilst  at  another  he  insists  that  it  is  per- 
missible and  should  not  be  forbidden,  as  when  he  seeks  to 
justify  such  unpardonable  transactions  as  the  Hocking  pool. 

His  clients  have  however  no  doubt  of  the  entire  legiti- 
macy of  the  practice.  Mr.  Sturgis  said  that  paying  com- 
missions to  manipulate  a  market  was  like  spending  so  much 
money  for  advertising  the  security.  He  was  quite  oblivious 
of  the  fact  that  a  man  who  in  the  ordinary  course  of  business 
should  sell  stock  by  advertising  that  so  many  thousand  shares 
were  actually  being  bought  and  sold  day  by  day  at  a  given 
price,  and  who  was  actually  "going  through  the  motions" 
and  paying  commissions  on  both  sides  of  the  transaction  for 
the  sole  purpose  of  deceiving  would-be  purchasers  whom  he 
was  thereby  seeking  to  attract  into  the  belief  that  such  pur- 
chases and  sales  were  genuine,  would  clearly  be  guilty  of  lar- 
ceny. Yet  that  is  precisely  the  intent  and  effect  of  these 
manipulated  transactions  that  form  so  large  a  part  of  the 
business  of  the  Exchange  and  it  is  passing  strange  that  the 
members  are  so  obscessed  by  self-interest  that  they  cannot  ap- 
preciate the  perfect  analogy  in  principle  between  the  two 
transactions. 

Anyone  who  is  interested  in  creating  an  active  market  in 
a  given  security  should  hereafter  be  required  to  frankly  set 
forth  his  purpose  over  his  own  signature,  advising  its  pur- 
chase, for  which  someone  can  be  held  responsible,  instead  of 
continuing  the  present  underhand  methods  of  false  rumors 
of  impending  developments,  "melons"  to  be  cut,  dividends 
to  be  increased,  large  earnings,  great  market  activity  (manu- 
factured for  the  purpose  of  misleading),  etc.,  that  are  the  ac- 
companiments of  "creating  activity",  "stimulating  specula- 
tion" and  of  the  various  other  forms  of  manipulation. 

Successful  manipulation  of  established  securities  fre- 
quently depends  on  these  methods.  In  order  to  get  the 
speculative  public  interested  in  the  stock  there  must  be 
"something  doing"  in  it.  They  must  be  made  to  believe  that 
they  are  getting  advance  information  of  what  is  "doing". 
The  whole  performance  when  thus  conducted  is  essentially 
in  the  nature  of  a  "confidence  game". 

The  most  amazing  development  of  the  discussion  before 
your  Committee  and  of  the  testimony  of  the  officials  of  the 


\ 


14 


15 


Exchange  before  the  Pujo  Committee  was  the  blind  persist- 
ency of  the  Exchange  in  defending  this  practice  and  strug- 
gling to  retain  it,  apparently  because  of  the  large  proportion 
of  the  dealings  that  it  represents.  They  can  no  more  be  per- 
mitted to  continue  such  practices  than  they  could  retain 
**wash  sales"  and  ^'matched  orders''  that  until  recent  years 
were  also  regarded  as  legitimate;  nor  than  they  could  con- 
tinue on  the  list  their  so-called  ** Unlisted  Department''  of 
blind  pools,  such  stocks  as  Amalgamated  Copper  and  Ameri- 
can Sugar  Kefining  Company,  which  refused  to  disclose  their 
affairs  and  were  yet  among  the  most  active  stocks. 

Every  important  reform  looking  to  the  abatement  of  abuses 
that  were  the  source  of  profit  has  been  fairly  dragged  from 
the  Exchange  under  threat  of  subjecting  it  to  regulation. 

If  I  remember  rightly,  the  assertion  was  made  before 
you  that  manipulation  represented  only  a  small  proportion 
of  the  daily  transactions  on  the  Exchange.  There  is  no  proof 
to  support  that  statement.  It  is  contrary  to  the  facts  to  be 
fairly  deduced  from  the  mass  of  statistical  and  other  evi- 
dence before  the  Pujo  Committee. 

No  One  can  read  those  statistics  of  fabulous  transactions 
in  connection  with  the  oral  testimony  and  remain  for  a  mo- 
ment in  doubt  as  to  the  gigantic  scale  on  which  manipulation 
has  been  conducted  nor  as  to  the  hundreds  of  millions  that 
have  been  annually  taken  from  the  public,  and  dishonestly 
taken,  by  that  practice.  I  refer  now  to  the  manipulation  in 
active  and  established  securities  and  not  to  that  practiced 
to  create  an  appearance  of  activity  in  a  new  security,  which 
though  little  less  justifiable  is  not  resorted  to  from  the  same 
sordid  motives. 

The  Exchange  has  presented  no  facts  or  figures  that  at- 
tempt to  challenge  the  proofs  before  you.  It  contents  itself 
with  vague  assertion,  which  by  the  way,  is  characteristic  of 
its  entire  argument  before  you.  An  analysis  of  these  state- 
ments, not  made  under  oath  and  not  subjected  to  the  test  of 
methodical  cross-examination  by  anyone  familiar  with  the 
facts,  contrasted  with  the  results  accomplished  through  an  in- 
quiry conducted  under  the  forms  of  law  with  the  aid  of  coun- 
sel, must  satisfy  you  of  the  unsubstantial  and  unreliable 
character  of  the  information  secured  by  the  former  method. 
These  assertions  by  the  Exchange  are  further  contradicted 
by  the  findings  of  the  Hughes  Commission  of  1909,  on  which 


the  Stock  Exchange  relies,  for  reasons  to  us  unaccountable; 
notwithstanding  the  shortcomings  of  that  unofficial  investiga- 
tion it  constitutes  a  severe  arraignment  of  the  Exchange. 

Among  other  things  that  Commission  had  the  following 
to  say  under  the  heading  ** Character  of  Transactions": 

It  is  unquestionable  that  only  a  small  part  of  the  trans- 
actions upon  the  Exchange  is  of  an  investment  character. 
A  substantial  part  may  be  characterized  as  virtual  gam- 
bling. 

It  had  the  following  among  other  things  to  say  under 

the  heading  *  *  Patrons  of  the  Exchange  " : 

The  patrons  of  the  Exchange  may  be  divided  into  the 
following  groups: 

(1)  Investors,  who  personally  examine  the  facts  relating 
to  the  value  of  securities  or  act  on  the  advice  of  reputable 
and  experienced  financiers,  and  pay  in  full  for  what  they 
buy. 

(2)  Manipulators,  whose  connection  with  corporations  is- 
suing or  controlling  particular  securities  enables  them  under 
certain  circumstances  to  move  the  prices  up  or  down,  and 
who  are  thus  in  some  degree  protected  from  dangers  en- 
countered by  other  speculators. 

(3)  Floor  traders,  who  keenly  study  the  markets  and  the 
general  conditions  of  business  and  acquire  early  information 
concerning  the  changes  which  affect  the  values  of  securities. 
From  their  familiarity  with  the  technique  of  dealings  on 
the  Exchange,  and  ability  to  act  in  concert  with  others,  and 
thus  manipulate  values,  they  are  supposed  to  have  special 
advantages  over  other  traders. 

(4)  Outside  operators  having  capital,  experience  and 
knowledge  of  the  general  conditions  of  the  business.  Testi- 
mony is  clear  as  to  the  result  which,  in  the  long  run,  at- 
tends their  operations;  commissions  and  interest  charges 
constitute  a  factor  always  working  against  them.  Since  good 
luck  and  bad  luck  alternate  in  time,  the  gains  only  stimulate 
these  men  to  larger  ventures,  and  they  persist  in  them  till 
a  serious  or  ruinous  loss  forces  them  out  of  the  *  *  Street '  *. 

(5)  Inexperienced  persons,  who  act  on  interested  advice, 
**tips,'*  advertisements  in  newspapers,  or  circulars  sent  by 
mail,  or  **take  flyers'*  in  absolute  ignorance,  and  with  blind 
confidence  in  their  luck.  Almost  without  exception  they 
eventually  lose. 

Under  the  head  of  ** Manipulation  of  Prices"  it  had  the 
JfoUowing  to  say: 

A  subject  to  which  we  have  devoted  much  time  and  thought 
is  that  of  the  manipulation  of  prices  by  large  interests. 
This  falls  into  two  general  classes: 

(1)  That  which  is  resorted  to  for  the  purpose  of  making 
a  market  for  issues  of  new  securities. 


16 


(2)  That  which  is  designed  to  serve  merely  speculative 
purposes  in  the  endeavor  to  make  a  profit  as  the  result  of 
fluctuations  which  have  been  planned  in  advance. 

The  first  kind  of  manipulation  has  certain  advantages, 
and  when  not  accompanied  by  "matched  orders"  is  unob- 
jectionable per  se.  It  is  essential  to  the  organization  and 
carrying  through  of  important  enterprises,  such  as  large  cor- 
porations, that  the  organizers  should  be  able  to  raise  the 
money  necessary  to  complete  them.  This  can  be  done  only 
by  the  sale  of  securities.  Large  blocks  of  securities,  such 
as  are  frequently  issued  by  railroad  and  other  companies, 
cannot  be  sold  over  the  counter  or  directly  to  the  ultimate 
investor,  whose  confidence  in  them  can,  as  a  rule,  be  only 
gradually  established.  They  must  therefore,  if  sold  at  all, 
be  disposed  of  to  some  syndicate,  who  will  in  turn  pass  them 
on  to  middlemen  or  speculators,  until  in  the  course  of  time 
they  find  their  way  into  the  boxes  of  investors.  But  prudent 
investors  are  not  likely  to  be  induced  to  buy  securities  which 
are  not  regularly  quoted  on  some  exchange,  and  which  they 
cannot  sell,  or  on  which  they  cannot  borrow  money  at  their 
pleasure.  If  the  securities  are  really  good  and  bids  and  of- 
fers bona  fide,  open  to  all  sellers  and  buyers  the  operation 
is  harmless.  It  is  merely  a  method  of  bringing  new  invest- 
ments into  public  notice. 

The  second  kind  of  manipulation  mentioned  is  undoubt- 
edly open  to  serious  criticism.  It  has  for  its  object  either 
the  creation  of  high  prices  for  particular  stocks,  in  order 
to  draw  in  the  public  as  buyers  and  to  unload  upon  them 
the  holdings  of  the  operators,  or  to  depress  the  prices  and 
induce  the  public  to  sell.  There  have  been  instances  of 
gross  and  unjustifiable  manipulation  of  securities,  as  in  the 
case  of  American  Ice  stock.  While  we  have  been  unable  to 
discover  any  complete  remedy  short  of  abolishing  the  Stock 
Exchange  itself,  we  are  convinced  that  the  Exchange  can 
prevent  the  worst  forms  of  this  evil  by  exercising  its  in- 
fluence and  authority  over  the  members  to  prevent  them. 
When  continued  manipulation  exists  it  is  patent  to  expe- 
rienced observers. 


This  argument  in  favor  of  certain  classes  of  manipulation 
was  repeated  before  your  Committee  by  Mr.  Horace  White 
and  Mr.  Edward  D.  Page,  members  of  the  Commission.  It 
was  also  defended  by  representative  members  of  the  Ex- 
change before  the  Pujo  Committee  but  was  unqualifiedly  con- 
demned in  the  Report. 

Counsel  now  tell  us  that  **it  used  to  be''  considered  quite 
legitimate  but  that  there  is  now  a  division  of  opinion  on  the 
subject  and  hence  the  Exchange  has  recently  (since  the  ex- 
posures of  the  Pujo  Committee)  enacted  rules  to  prevent  it. 
On  examining  those  rules  you  will  find  that  they  accomplish. 


17 


no  such  result.  Under  pretense  of  such  rules  it  is  attempting 
to  perpetuate  the  practice.  Besides,  if  it  is  defensible,  as 
Counsel  and  members  of  the  Exchange  continue  to  insist  be- 
fore you  in  oral  statements  and  in  their  briefs,  why  prevent 
it!  Can  anyone  tell  us  now  after  these  days  of  discussion 
where  the  Exchange  really  stands  on  this  crucial  question? 
I  confess  I  cannot,  but  I  can  plainly  see  what  it  seeks  to  ac- 
complish here  by  its  tortuous  attitude.  It  wants  to  make 
it  appear  liere  that  manipulation  is  forbidden  in  order  to  de- 
feat legislation  and  still  to  be  able  to  insist  hereafter  when 
that  peril  has  passed  that  what  it  is  doing  is  not  manipu- 
lation but  is  something  that  it  has  always  claimed  the  rffeht 

to  do. 

The  fact  is  that  manipulation  as  now  practiced  on  the  Ex- 
change and  as  permitted  under  their  amended  rules  is  dis- 
honest whether  resorted  to  for  the  purpose  of  intro- 
ducing a  new  security  or  for  any  other  purpose.  True, 
it  is  five  years  since  the  Hughes  Commission  made  its 
report  and  there  were  many  things  then  tolerated  in  corpo- 
rate management  and  in  the  financial  world  generally  that 
would  not  dare  be  attempted  today,  thanks  to  the  exposure 
of  corporate  abuses  by  the  much-despised  ''reformers"  and 
to  the  improvements  in  moral  standards  of  business  for  which 
their  unwelcome  activities  are  responsi])le.  But  it  is  still 
inconceivable  that  even  in  1909  a  body  of  New  York  gentle- 
men as  distinguished  as  were  the  members  of  this  Commis- 
sion should  have  become  so  permeated  with  the  customs  and 
atmosphere  of  the  financial  world  in  which  they  moved  as  to 
have  been  led  into  putting  in  an  official  document  the  state- 
ment that  manipulation 


or  that 


which  is  resorted  to  for  the  purpose  of  making  a  market  for 
issues  of  new  securities  is  unobjectionable  pe?'  se 


It  is  essential  to  the  organization  and  carrying  through 
of  important  enterprises. 


It  is  nothing  of  the  kind.  It  is  distinctly  disreputable  and 
the  Exchange  will  shortly  be  made  to  see  it  in  that  light  as 
they  have  been  taught  to  see  other  practices  that  they  once 
thought  to  be  legitimate. 

Is  it  to  be  wondered  at  that  no  legislation  looking  to 


18 


19 


the  correction  of  the  abuses  that  were  pointed  out  by  this 
Commission  followed  its  report  and  that  nothing  was  done  in 
that  direction  until  July,  1913,  following  the  public  exposure 
by  the  Pujo  Committee  of  the  same  conditions  that  this  Com- 
mission privately  investigated?  Is  there  any  occasion  for 
surprise  that  there  was  no  abatement  of  the  practice  of  man- 
ipulation in  view  of  the  quasi-encouragement  lent  to  it  by 
this  Keport?  It  is  no  exaggeration  to  say  that  the  bulk  of 
the  securities  on  the  list  has  been  at  one  time  or  another 
manipulated — not  for  the  purpose  of  creating  a  market  or 
an  appearance  of  activity  in  a  new  security,  but,  as  stated  in 
the  Hughes  Report,  either 

to  create  high  prices  for  particular  stocks  in  order  to  draw 
in  the  public  as  buyers  or  to  unload  upon  them  the  holdings 
of  the  operators  or  to  depress  the  prices  and  induce  the 
public  to  sell. 

The  few  instances  of  manipulation  that  were  discussed 
at  the  hearings  before  your  Committee  were  not  the  most 
aggravated  cases.  That  of  the  California  Petroleum  Com- 
pany which  was  so  much  discussed  was  among  the  least  ob- 
jectionable in  form  and  purpose.  It  was  selected  for  com- 
ment in  the  Report  of  the  Pujo  Committee  mainly  because  it 
was  happening  during  the  taking  of  testimony. 

A  case  more  characteristic  of  the  general  purposes  and 
methods  of  manipulation  by  reason  of  its  daring  and 
magnitude  and  of  the  extent  to  which  the  public  was 
victimized  is  that  of  the  Amalgamated  Copper  Company.  It 
is  a  long  story  that  was  only  partially  told  before  the  Pujo 
Committee  because  many  of  the  facts  were  rendered  unprove- 
able  through  the  death  of  Mr.  Henry  H.  Rogers  and  others 
that  were  expected  to  be  established  by  his  partner  in  the 
enterprise,  Mr.  William  Rockefeller,  were  unobtainable  be- 
cause of  what  was  claimed  to  be  the  then  desperate  condition 
of  Mr.  Rockefeller's  health.  It  is  as  stirring  as  any  tale  of 
pirating  on  the  high  seas  that  you  have  ever  read  and  was 
practiced  by  the  same  insiders  over  and  over  again,  but 
there  is  not  time  to  tell  it  here.  You  can  read  the  outlines  be- 
tween the  lines  of  the  testimony  and  statistics  that  are  before 
you.  Time  and  again  the  prices  were  juggled  by  them 
up  and  down  from  $10  to  $50  or  more  per  share  to 
the  tune  of  dealings  ranging  from  twenty  to  forty  millions 


of  shares  per  year,  dependent  on  whether  they  wanted  to 
shake  out  weak  holders  so  as  to  buy  cheaply  or  put  up  the 
price  preparatory  to  unloading  the  stocks  thus  ^^accumulat- 
ed.'' High  finance  would  be  a  comparatively  unprofitable 
industry  without  the  use  of  the  machinery  of  the  Stock  Ex- 
change. 

The  Exchange  was  a  party  to  it  each  time  in  the  sense  that 
it  lent  its  facilities  to  wliat  was  neither  more  nor  less  than  a 
*M)lind  pool"  by  permitting  vast  dealings  without  requiring 
information  of  its  assets  or  earnings  or  any  of  the  facts  cou- 
cerning  it  which  the  Exchange  was  finally  forced  to  exact, 
after  the  harvest  had  been  reaped  from  the  public.  Happily, 
some  of  those  methods  are  part  of  the  history  of  the  past, 
but  history  has  the  habit  of  repeating  itself.  Perhaps  there 
is  no  such  danger  under  the  present  alert  administration  of 
the  Exchange,  but  it  has  such  a  past  to  live  down  that  it 
should  be  patient  with  those  who  seek  to  aid  in  making-  im- 
possible  the  repetition  of  the  past  misdeeds. 

At  the  moment  the  public  is  wary,  and  the  Exchange  is  on 
its  good  behavior  except  as  to  a  certain  amount  of  manipu- 
lation, which  it  seems  unwilling  to  prevent  and  seeks  to  jus- 
tify. Recent  exposures  of  financial  and  Stock  Exchange 
methods  have  made  the  public  timid.  Business  is  stagnant  and 
all  seems  serene.  It  is  no  time  for  creating  speculative  ex- 
citement. The  old  masters  of  the  game  of  ''rigging  markets" 
like  Keene  and  Gates  are  gone.  The  times  are  not  propitious 
to  develop  the  new  ones  who  will  take  their  places.  Unless 
the  ''industry"  itself  is  stopped,  who  can  tell  when  others 
will  arise  to  take  the  places  of  those  who  have  passed  away 
or  are  in  temporary  retirement  waiting  for  the  storm  to 
blow  over  and  who  will  need  their  Keenes'  and  Gates'?  Does 
anybody  doubt  that  they  will  be  on  hand  unless  the  inexorable 
hand  of  the  law  has  meantime  stepped  in  to  protect  the  ever- 
gullible  public? 

The  Exchange  should  welcome  the  opportunity  to  be  pro- 
tected against  itself. 

Unless  I  wholly  misapprehend  the  operations  of  our  finan- 
cial system  the  regulation  by  law  of  the  Stock  Exchange  is 
an  indispensable  condition  precedent  to  the  destruction  of 
the  control  of  great  financial  credits  by  a  few  men  or  to  any 
effective  corporate  reform  in  this  country.    It  is  by  the  illegiti- 


20 


21 


ll 


mate  use  of  the  facilities  of  this,  the  world's  greatest  security 
market,  that  the  vast  predatory  fortunes  liave  been  filched 
from  the  public.  The  relation  and  importance  of  the  Ex- 
change to  corporate  independence  of  banking  domination  are 
little  understood.  We  shall  accomplish  nothing  substantial 
in  the  direction  of  the  coveted  goal  of  financial  emancipation 
toward  which  we  are  striving  until  this  factor  is  appreciated 
and  dealt  with  as  an  essential  part  if  not  the  most  essential 
factor  in  the  general  scheme  of  reform. 

This  discussion  before  you  has  been  conducted  on  the  part 
of  the  Exchange  as  though  there  w^ere  no  official  data  to  guide 
us  in  determining  the  extent  of  the  existing  abuses  and  on 
the  assumption  that  the  field  of  irresponsible  assertion  is 
wide  open.  And  so  we  have  been  regaled  with  state- 
ments unsupported  by  proof  as  to  the  character  ex- 
tent and  methods  of  dealings  on  the  Exchange  that 
are  challenged  at  almost  every  point  by  statistics  and  by  the 
testimony  of  the  officials  of  the  Exchange,  made  at  a  time 
when  they  were  under  the  wholesome  restraint  of  having 
their  assertions  analyzed  by  the  test  of  a  methodical  examina- 
tion. 

The  opponents  of  this  legislation  seem  also  to  have  lost 
sight  of  the  fact  that  after  months  of  Qxhaustive  investigation 
in  which  the  Exchange  was  represented  by  Counsel  and  was 
afforded  the  fullest  opportunity  to  present  its  case  this  Bill 
was  favorably  reported  by  a  Committee  of  the  House  of  Rep- 
resentatives of  the  Sixtv-second  Consrress  bv  the  unanimous 
action  of  the  seven  Democratic  members  of  that  Committee, 
based  upon  a  voluminous  record  of  sworn  testimony  support- 
ed by  documents  and  statistics. 

I  quote  from  their  Report  on  this  subject  as  follows : 

The  general  public,  which  has  grown  to  look  upon  the 
exchange  with  distrust  because  of  the  practices  that  have 
been  permitted,  will  be  given  new  confidence  in  it  when  it 
is  under  legal  supervision. 

Notwithstanding  these  facts  it  contends  that  it  should 
be  permitted  to  continue  its  voluntary  organization  with 
the  privileges  and  freedom  of  action  of  a  private  club  and 
should  not  be  made  subject  to  legislative  or  judicial  control 
or  supervision,  and  that  it  is  not  amenable  to  Federal  regu- 
lation in  its  use  of  the  mails  and  of  the  telegraph  and  tele- 
phone in  interstate  commerce  and  in  the  dealings  of  its  mem- 
bers with  foreign  countries. 

To  this  contention  your  committee  is  unable  to  agree.    It 


is  incongruous  that  such  an  institution  wielding  such  power 
and  equipped  to  perform  such  useful  and  important  func- 
tions in  our  economic  system  should  be  uncontrolled  by  law. 
On  the  other  hand,  your  committee  believes  that  incor- 
poration and  regulation  would  banish  from  the  exchange 
transactions  which  now  disgrace  it,  brmging  in  their  place 
a  greater  volume  of  business  of  an  investment  and  other- 
wise legitimate  character,  and  marking  the  dawn  of  a  new 
era  of  prosperity  for  its  members  and  of  usefulness  to  the 
public. 


(P.  115,) 


tI"  W  W  w 


In  other  words,  the  facilities  of  the  New  York  Stock  Ex- 
change are  employed  largely  for  transactions  producing 
moral  and  economic  waste  and  corruption;  and  it  is  fair  to 
assume  that  in  lesser  and  varying  degree  this  is  true  or  may 
come  to  be  true  of  other  institutions  throughout  the  country 
similarly  organized  and  conducted. 

Your  committee  believes,  therefore,  that  Congress  has 
power  unconditionally  to  prohibit  the  mails,  the  interstate 
telegraph  and  telephone,  the  national  banks,  and  all  other 
instrumentalities  under  its  control,  from  being  used  in  exe- 
cuting, negotiating,  promoting,  increasing  or  otherwise  aid- 
ing transactions  on  such  stock  exchanges. 

(P.  116.) 

It  seems  also  to  have  been  overlooked  that  three  of  the 
four  Republican  members  of  that  Committee  joined  in  the 
recommendation  of  the  majority  on  this  subject  in  their 
Minority  Report.  I  quote  from  the  Minority  Report  as  fol- 
lows : 

Many  abuses  are  disclosed  by  the  evidence  produced  be- 
fore the  committee,  a  number  of  which  are  well  known  to 
the  public  and  recognized  by  everybody  at  all  familiar  with 
the  business  conditions  in  this  country.  Abuses  on  the  stock 
exchange,  of  quite  long  standing,  were  disclosed  before  the 
committee,  as  w^re  also  abuses  existing  in  clearing-house 
associations,  especially  in  New  York  City. 

Evils  existing  in  both  stock  exchanges  and  clearing-house 
associations  could  be  corrected  by  the  exchanges  and  associa- 
tions themselves,  if  they  ^vere  so  inclined.  They  having 
failed  and  neglected  to  remedy  the  abuses  existing  in  their 
conduct  and  operation  in  our  opinion  it  is  the  duty  of  each 
State  in  which  these  exchanges  or  associations  are  located 
to  compel  their  incorporation  and  to  regulate  their  manage- 
ment by  appropriate  legislation.  Should  the  exchanges  and 
the  associations,  as  well  as  the  various  States,  neglect  this 
plain  and  imperative  duty,  then  we  believe  that  it  is  the  duty 
of  Congress  to  exercise  any  jiirisdiction  or  power  conferred 
upon  the  Federal  Government  by  the  Constitution  to  pass 
such  restrictive  and  regulative  legislation  as  may  be  neces- 


/ 


O') 


sary.  This  duty  arises  from  the  fact  that  these  evils  are  not 
such  as  affect  only  the  local  communities  in  which  they  exist, 
but  their  results  are  as  broad  as  the  business  interests  of 
the  country,  and  affect  in  their  most  intimate  and  important 
business  relations  all  the  people  thereof. 

While  agreeing  substantially  with  the  majority  upon  many 
of  the  abuses  to  be  corrected  in  the  financial  system,  the 
stock  exchanges  and  the  clearing-house  associations,  the 
undersigned  have  doubts  as  to  the  wisdom  of  some  of  the 
remedies  proposed  by  the  majority  to  correct  these  abuses. 

(The  last  clause  refers  to  other  subjects  discussed  in  the 
Report — not  to  stock  exchanges.) 

The  opponents  of  the  Bill  also  ignore  the  circumstance 
that  the  investigation  disclosed  that  the  manipulation  of 
prices  was  regarded  and  defended  by  the  Exchange  as  a  part 
of  its  legitimate  business,  and  that  the  Committee  found  the 
existence  of  an  incredibly  deplorable  state  of  affairs  which  de- 
mands prompt  and  drastic  correction  for  the  public  protec- 
tion and  which  can  be  corrected  in  no  way  other  than  that 
proposed  by  this  Bill. 

The  following  language  of  Chief  Justice  White  in  Lewis  . 
Pnhlislung  Co.  vs.  Morgan,  decided  by  the  Supreme  Court  in 
June  1913,  in  which  the  right  of  Congress  was  sustained  to 
exclude  from  the  second  class  privileges  of  the  mail  news- 
papers that  did  not  make  certain  disclosures,  is  peculiarly 
applicable  here: 

Under  that  six-word  grant  of  power  {referring  to  the 
Post  Roads  Clause  of  the  Constitution)  the  great  postal 
system  of  this  country  has  been  built  up,  involving  *  *  *  * 
the  suppression  of  lotteries  and  a  most  efficient  suppression 
of  fraudulent  and  criminal  schemes  impossible  to  he  reached 
in  any  other  icay. 

The  manipulation  of  prices  of  stocks  is  another  of  the 
''fraudulent  schemes  impossible  to  be  reached  in  any  other 
way.'' 

The  operations  of  the  Stock  Exchanges  was  only  one  of  the 
many  topics  bearing  on  the  concentration  of  the  control  of 
credits  with  which  the  Committee  had  to  deal.  It  constitutes 
only  one  of  the  27  separate  Recommendations  of  the  Report. 

It  was  accordingly  impossible  for  the  Committee  within  the 
limited  time  at  its  disposal  to  go  further  in  the  taking  of  testi- 
mony on  that  subject  than  to  present  selected  instances  by  way 
of  illustrating  the  character  of  the  abuses  that  were  being 


23 


perpetrated  upon  the  community,  but  the  disclosures  made 
were  such  as  to  shock  and  amaze  the  country  and  to  demand 
redress. 

On  the  subject  of  the  manipulation  of  prices  the  Commit- 
tee presented  a  dozen  or  more  cases,  some  of  them  extending 
over  a  series  of  years,  but  they  were  selected  merely  by  way 
of  illustrating  a  general  practice.  Nothing  could  bet- 
ter show  the  perils  to  a  legislative  body  of  relying  up- 
on loose  assertions  made  in  the  course  of  an  infoiinal 
hearing  conducted  as  were  the  proceedings  before  this  Com- 
mittee, where  no  one  is  prepared  with  the  material  with  which 
to  challenge  inaccurate  statements,  than  an  analysis  of 
a  few  of  the  assertions  that  are  made  with  respect  to  these 
official  statistics.  You  are  told  that  they  were  **  se- 
lected cases  of  the  most  speculative  stocks  grouped  to  create 
dramatic  effect"  and  that  ''if  tables  had  been  prepared  to 
show  normal  conditions  a  different  showing  would  have  been 
made.''  But  no  such  tables  are  presented,  and  it  is  not 
pointed  out  wherein  these  tables  are  inaccurate.  It  was  with- 
in the  power  of  the  Exchange  to  have  presented  other  tables 
before  the  Pujo  Committee  as  it  was  within  its  power  before 
this  Committee  to  have  challenged  these  detailed  figures  by 
facts.  Instead  of  doing  so  it  again  contents  itself  with  vague 
generalities  and  unsupported  assertions. 

The  Pujo  Committee  could  not  have  presented  statistics 
of  the  dealings  covering  the  entire  1500  or  more  securities 
dealt  in  on  the  Exchange,  day  by  day  and  month  by  month 
over  a  period  of  from  2  to  10  years  as  they  did  in  these  dozen 
or  more  selected  cases.  It  would  have  required  years  and 
would  have  cost  hundreds  of  thousands  of  dollars  in  fees  of 
experts.  It  naturally  selected  active  stocks  as  examples  of 
manipulation  to  establish  the  existence  and  something  of  the 
extent  of  the  practice.  Now  we  are  told  that  if  there  had 
been  others  they  would  have  disclosed  a  different  state 
of  facts  as  to  the  others  and  that  these  tables  should  not  be 
therefore  treated  as  examples  of  the  general  practice. 

The  Pujo  Committee  was  not  trying  a  lawsuit. 
It  was  investigating  the  charge  that  there  was  a 
concentration  of  the  control  of  credit  in  this  coun- 
try. The  methods  of  the  Stock  Exchange  were  inquired  into 
because  of  their  relation  to  the  general  question.  It  was  one 
of  many  subjects  bearing  on  that  control.     The  practice  of 


II 


24 


manipulating  stocks  constituted  one  of  those  methods.  There 
were  others  equally  involved  in  the  general  subject  of  inquiry. 
Banking  control,  interlocking  directors,  holding  companies, 
life  insurance  control,  railroad  and  industrial  oro-anizations, 
Clearing  Houses  and  a  vast  number  of  other  topics  consti- 
tuted essential  features  of  the  inquiry.  It  is  now  ar- 
gued that  in  order  to  show  the  extent  of  manipulation  the 
Committee  should  have  traced  all  the  hundreds  of  millions  of 
transactions  affecting  every  security  on  the  list  over  a  series 
of  years.  The  statistics  presented  do  in  fact  trace  every  trans- 
action in  13  active  securities  day  by  day  and  month  by  month 
over  a  term  of  years  involving  as  to  such  securities  alone 
many  hundreds  of  millions  of  shares,  and  the  results  are  be- 
fore you.  The  answer  and  the  only  answer  to  this  mass  of 
statistics  is— not  other  statistics,  not  facts— but  the  bald  un- 
supported assertion  that  if  the  dealings  in  other  securities 
had  been  taken  their  dealings  would  have  shown  normal 
transactions.  In  other  words  that  there  might  have  been 
found  some  companies  whose  securities  were  not  manipulated. 
Ergo:  There  is  no  such  thing  as  manipnlationf 

So  reckless  was  the  action  of  the  members  that  the  Com- 
mittee was  able  to  establish  (a^s^in  merely  by  way  of  il- 
lustrating the  extent  of  the  abuse  and  the  persistent  unwill 
ingness  of  the  Exchange  authorities  to  interfere  with  these 
vicious  practices)  an  operation  that  was  actually  being  con- 
ducted in  the  manipulation  of  a  newly-listed  security  day  by 
day  on  an  enormous  scale  by  prominent  members  with  two 
leading  banking  houses  as  allies  and  associates,  whilst  the 
Inquiry  ivas  in  progress. 

The  details  of  this  particular  transaction,  which  is  typical 
of  the  method  of  ''making  a  market''  in  the  securities  of  a 
new  company  but  which  as  above  stated  is  far  less  aggravated 
than  others  that  were  proven  with  respect  to  the  manipulation 
of  the  securities  of  established  companies,  are  summarized  at 
pages  50-52  of  the  Report  in  the  following  lan£;'uage : 

The  California  Petroleum  Co.  flotation. — A  typical  in- 
stance of  manipulation  for  the  purpose  of  stimulating  specu- 
lation in  a  new  security  is  the  operation  in  the  stock  of  the 
California  Petroleum  Co.  begun  in  October  last  whilst  this 
investigation  was  in  progress  and  the  subject  of  manipula- 
tion of  securities  on  the  stock  exchange  was  under  active 
discussion. 


25 


This  company  was  organized  in  September,  1912,  with  an 
authorized  capital  of  $32,500,000— $17,500,000  preferred  and 
$15,000,000  common— of  which  $11,997,024  preferred  and 
$13,513,081  common  was  given  in  payment  for  the  stocks  of 
two  California  oil-producing  companies.  (Henry,  R.,  1251- 
1253.)  Simultaneously,  and  as  part  of  the  plan,  William 
Salomon  &  Co.,  bankers  of  New  York,  and  associates,  name- 
ly:  Hallgarten  &  Co.  and  Lewisohn  Bros.,  of  New  York,  and  a 
fourth  not  named,  for  $8,215,662  in  cash,  purchased  from 
the  vendors  $10,000,000  of  the'  preferred  and  $7,572,845  of 
the  common  stock  of  the  California  Petroleum  Company, 
which  the  latter  had  accepted  in  payment  for  the  stock  of 
the  two  producing  companies,  William  Salomon  &  Co.,  Hall- 
garten &  Co.,  and  Lewisohn  Bros,  each  taking  29  1/6  per 
cent  and  the  unnamed  associate  121/2  per  cent.  (Henry, 
R.  1253,  1255,  1270;  Exs.  149-153,  R.  1261-1266.) 

Thereupon  the  bankers,  as  we  shall  hereafter  call  them, 
formed  a  syndicate  in  New  York  to  underwrite  $5,000,000 
of  the  preferred  and  $2,500,000  of  the  common  stock  at 
the  price  of  $5,000,000  and  sold  to  a  London  syndicate  the 
same  amount  at  the  san;ie  price,  leaving  the  bankers  at  this 
point  with  a  profit  of  $1,784,338  in  cash  and  $2,572,845  in 
common  stock,  which  latter  they  sold  at  40  and  45.  (Henry, 
R.  1271,  1285.) 

The  bankers  also  joined  the  New  York  syndicate,  in  which 
altogether  there  were  104  members,  including — 

(a)  Three  corporations  affiliated  with  national  banks — 
two  of  them  in  New  York,  one  of  which  had  a  participation 
of  $500,000  and  the  other  $50,000,  and  one  outside  with  a 
participation  of  $50,000; 

(b)  One  trust  company  in  New  York  with  a  participa- 
tion of  $50,000 ;  and 

(c)  Twenty- four  officers  of  banks,  among  them  officers 
of  four  national  banks  in  New  York,  two  in  Chicago  and  one 
in  Detroit,  whose  aggregate  participations  were  $535,000, 
the  largest  single  participation — $50,000 — going  to  an  officer 
of  a  Wall  Street  bank  which  lends  on  stock-exchange  col- 
lateral.    (Henry,  R.  1271-1275.) 

The  stock  was  all  sold  at  an  advance  of  nearly  $500,000 
above  the  price  at  which  it  was  underwritten  on  the  day  it 
was  delivered  to  the  bankers — October  2,  1912 — and  before 
any  appreciable  number  of  the  syndicate  had  accepted  the 
offers  of  participation.  Thus  nearly  all  the  underwriters, 
including  the  bank  officers,  got  their  profits  without  having 
made  any  commitment ;  and  none  of  them  put  up  any  money 
or  had  to  take  any  stock.     (Henry,  R.  1277,  1278.) 

Mr.  Henry,  of  Salomon  &  Co.,  who  was  called  as  a  witness 
in  regard  to  this  transaction,  having  refused  to  divulge  the 
names  of  the  national  bank  officers  who  received  participa- 
tions in  this  syndicate,  his  contumacy  was  certified  to  the 
House  and  from  there  to  the  United  States  attorney  for  the 
District  of  Columbia  for  prosecution  under  sections  102,  103 
and  104  of  the  Revised  Statutes.  Your  committee  is  of 
opinion  that  the     information  sought  from     IMr.  Henry  is 


26 

germane  to  the  question,  Whether  national  bank  officers  are 
being  infiuenced  by  any  form  of  reward  to  lend  the  money 
of  their  banks  on  newly-listed  and  unseasoned  stocks  ?  It  was 
impossible  for  the  Committee  without  knowing  the  identity 
of  the  banks  and  officers  to  determine  whether  these  partici- 
pations to  officers  were  given  for  the  purpose  of  inducing 
the  banks  they  served  to  accept  these  new  securities  as  col- 
lateral for  loans  or  whether  they  were  so  accepted. 

Th^  stock  of  the  California  Petroleum  Co.  was  listed  on 
the  New  York  Stock  Exchange  on  October  5,  after  the  por- 
tion underwritten  by  the  syndicate  and  the  separate  hold- 
mgs  ot  the  bankers  had  all  been  sold.     (Henrv,  R.  1281  ) 

Thereafter  an  operation  in  the  stock  was  conducted  (prin- 
cipally m  the  common)  on  the  New  York  Stock  Exchange 
by  Lewisohn  Bros,  for  the  joint  account  of  the  bankers,  for 

S'%?fioP?o^o''^  '^xf '''^'^'^'  ""^  ''making  a  market."  (Henry, 
u.  1Z«J,  128 J.)  Under  the  general  direction  of  Salomon  & 
Oo.,  Lewisohn  Bros,  would  put  in  separate  orders  to  dif- 
terent  brokers  on  the  morning  of  every  day  to  sell  on  a 
scale  up  and  to  buy  on  a  scale  down,  so  adjusted  that  at 
the  end  of  the  day  they  would  have  bought  and  sold,  so  far 
as  market  conditions  permitted,  s^ibstantially  the  same  num- 
ber of  shares.  (Henry,  R.  1282,  1284.)  There  is  in  the 
record  a  table  showing  the  purchases  and  sales  by  Lewisohn 
Bros,  and  the  prices  day  by  day  from  October  5,  when  the 
stock  was  listed,  through  the  end  of  that  month,  from  which 
It  appears  Hhat  during  that  period  of  about  21  business 
aays  lbd,UUO  shares  w^ere   purchased  and   172,900  sold   by 

^F?'?Q^A^T>^^''of^'^"''^  ^^    themselves  and  associates. 
ILx.  164: 1/2,  R.  1186.) 

Under  the  influence  of  this  operation  the  price  of  the  com- 
mon stock,  starting  at  about  62  1/2,  quickly  rose  to  72;  it 
had  fallen  to  50  by  December.  (Henry,  R.  1285-1286  )  Mr 
Henry  of  Salomon  &  Co.,  stated  that  he  supposed  the  public 
bought  largely  on  the  rise.    (R.  1286.) 

The  total  purchases  and  sales  on  the  exchange  during 
these  21  days  were  362,270  shares,  which  was  equal  to  over 

sto'Tk  ""^^     ^""'^'   ^^'^  ^""^^^   outstanding  common 

It  may  be  remarked  in  passing  that  this  stock,  which  was 
thus  manipulated  to  $72  per  share  and  distributed  to  the  pub- 
lic has  since  sold  as  low  as  $16  and  is  now  selling  at  $25. 

The  Exchange  insists  that  this  is  a  legitimate  transac- 
tion because  it  was  resorted  to  for  the  purpose  of  -introducing 
a  new  security."  They  say  the  bankers  had  sold  their  stock 
before  this  was  done  and  there  was  no  profit  for  them  in  this 
operation.  The  facts  as  proven  do  not  sustain  them.  True 
the  first  bankers  syndicate  had  sold  its  stock.  But  to  whom? 
To  the  second  syndicate  of  which  Messrs.  Lewisohn  were  the 


27 


managers  and  the  bankers  were  also  members.  The  manipu- 
lation was  conducted  by  the  second  syndicate,  which  bought 
163,000  shares  and  sold  172,900  shares  during  the  21 
days  of  its  operations.  In  the  same  period  there 
were  362,270  shares  sold  on  the  Exchange  and  an  equal 
number  of  course  purchased.  What  about  the  dear  public 
that  was  -  landed '^  with  the  199,270  shares  that  were  not 
represented  by  the  Syndicate  dealings,  at  prices  ranging  be- 
tween $60  and  $72.50  per  share  that  subsequently  declined 
to  $16.  and  are  now  selling  at  $25 ! 

The  only  comment  that  would  appear  necessary  in  an- 
swer to  the  claim  of  the  Exchange  that  the  disciplining  of  its 
members  should  be  left  exclusively  in  its  hands  without  inter- 
ference or  review  by  the  Courts  is  to  refer  to  the  fact  that 
neither  in  this  nor  in  the  many  other  instances  of  manipula- 
tion uncovered  by  the  Committee  was  there  any  effort  made 
to  discipline  the  offenders,  except  where  the  operation  resulted 
in  insolvency.  The  transactions  were  on  the  contrary  sought  to 
be  justified.  Both  Mr.  Milburn  and  Mr.  Van  Antwerp  again 
defended  the  California  Petroleum  manipulation  before  your 
Committee  as  a  means  of  ^ stabilizing  the  market."  The 
criticism  is  not  based  on  the  mere  fact  that  the  price  of  the 
stock  has  declined.  That  is  a  risk  incident  to  all  business. 
Nor  is  it  suggested  that  this  is  not  a  meritorious  security. 
The  reputable  banking  houses  that  issued  the  securities  would 
never  have  offered  them  if  they  had  not  believed  in  their 
merit.  The  complaint  is  of  the  devices  by  which  the  price 
was  maintained  and  the  public  interested. 

To  my  mind  these  transactions  are  indefensible.  If 
they  can  be  resorted  to  for  one  purpose  there  is  no  reason 
why  they  should  not  be  justifiable  for  any  other  purpose.  If 
it  is  permissible  to  create  a  false  appearance  of  activity  and 
of  rising  prices  in  a  new  security  in  order  to  attract  people 
to  buy,  why  is  not  the  same  fraudulent  device  defensible  in 
order  to  get  rid  of  old  securities  that  have  been  held  or 
accumulated  to  be  unloaded  on  the  public?  Or  to  depress 
prices  in  order  to  buy  cheaply  a  security  that  one  desires  to 
acquire  which,  by  the  way,  are  the  usual  forms  of  manipula- 
tion and  the  purpose  for  which  it  is  most  generally  employed  ? 
All  such  transactions  amount  in  effect  to  a  mock  auc- 
tion, with  the  public  as  the  victims.  They  are  vastly  more 
dangerous  and  far-reaching  than  the  familiar  form  of  mock 


28 


auction  because  conducted  under  the  cloak  of  an  honorable 
calling.  The  following  from  the  testimony  of  Mr.  Frank  K. 
Sturgis,  a  then  Governor  and  former  President  of  the  Ex- 
change is  instructive  on  this  point: 

Q.  Very  Avell ;  that  is  an  answer.  How  do  you  justify  as 
legitimate  tlie  transactions  of  a  pool  or  syndicate  in  giving 
out  buying  and  selling  orders  to  brokers  for  the  purpose  of 
lifting  the  price  of  the  stock  or  of  depressing  it  ? 

A.  Those  are  the  acts  of  individuals.  I  cannot  be  re- 
sponsible for  what  thousands  of  people  throughout  this 
country  do. 

Q.  Do  you  seek  to  justify  it? 

A.  It  depends  entirely  upon  circumstances.  I  have  already 
said  that  under  certain  conditions,  orders  given  out,  com- 
missions paid,  no  collusion  whatsoever,  the  broker  who  buys 
not  having  the  slightest  idea  where  the  order  comes  from 
that  the  broker  executes  to  sell — I  say  it  is  not  an  illegitimate 
transaction. 

•  •     *     #     # 

Q  #  #  *  ^jj^  y^^  ^^  g^^j  enough  to  answer  that 
question?  Is  not  the  operation,  at  times,  resorted  to  to  de- 
press prices,  and  at  other  times  to  lift  prices? 

A.  Yes;  I  can  consistently  answer  that. 

*  #     #     *     * 

Q.  You  approve  of  those  transactions,  do  you  ? 

A.  I  approve  of  transactions  that  pay  their  proper  com- 
missions and  are  properly  transacted.  You  are  asking  me 
a  moral  question,  and  I  am  answering  you  a  stock-exchange 
question. 

Q.  What  is  the  difference  ? 

A.  They  are  very  different  things. 

Q.  I  thought  so.  There  is  no  relation  between  a  moral 
question,  then,  and  a  stock-exchange  question? 

A.  Sometimes. 

Another  witness  (Mr.  Morse  at  p.  719)  described  the 
mechanism  of  manipulation  as  practiced  on  the  Exchange  as 
follows  : 

He  is  the  gentleman  who  manipulates  the  stock,  giving  the 
buying  and  selling  orders.     (Morse,  R.  710.) 

If  he  merely  wishes  to  make  a  stock  appear  active,  he  gives 
buying  and  selling  orders  in  about  equal  volume ;  if  he  wishes 
to  put  up  the  price,  he  gives  an  excess  of  buying  orders; 
if  he  wishes  to  depress,  he  givss  an  excess  of  selling  orders* 
(Morse,  R.  710,  711.) 

There  is  not  time  to  rehearse  here  the  innumerable  ways 
in  which  the  machinery  of  the  Exchange  is  shown  by  the  testi- 
mony to  have  been  used  with  impunity  over  a  long  series  of 


29 


years  and  up  to  the  conclusion  of  the  Inquiry  for  the  practice 
of  deception  upon  the  public. 

The  cases  of  the  Columbus  &  Hocking  Coal  &  Iron  pool, 
Rock  Island  and  California  Petroleum  Co.,  described  at  pages 
47  and  50  of  the  Eeport,  are  further  illustrations  of  one  of  the 
many  phases  of  the  evil  to  which  I  refer. 

Suffice  it  to  say  that  there  is  overwhelming  evidence  to 
support  the  findings  of  the  Committee.  The  testimony  comes, 
not  from  hearsay  nor  from  muckrakers  or  enemies,  but  from 
the  lips  and  the  records  of  the  members  themselves.  The 
Exchange  was  represented  before  the  Committee  by  the  same 
eminent  Counsel  who  appeared  before  you,  as  astute  and  re- 
sourceful as  any  in  the  land,  who  submitted  a  lengthy  printed 
argument  dealing  with  every  phase  of  the  law  and  facts.  The 
witnesses  who  testified  to  its  general  methods  and  practices 
were  selected  hy  the  Exchange  at  the  invitation  of  the  Com- 
mittee and  they  were  afforded  the  most  ample  opportunity 
for  explaining  and  supplementing  their  testimony. 

There  is  no  basis  for  the  impression  that  the  Exchange, 
through  its  press  bureau,  has  industriously  sought  to  create, 
in  order  to  excuse  the  exposure  of  its  methods  that  came  from 
the  lips  of  its  own  officials  who  were  selected  by  it  for  the 
purpose  of  presenting  its  defense,  that  there  was  anything 
unfair  or  one-sided  about  the  manner  of  the  Inquiry.  Here 
again  it  is  intimated  that  the  Exchange  did  not  have  the  op- 
portunity to  present  its  case  and  that  the  Committee  selected 
the  witnesses.  This  is  not  a  just  or  accurate  statement,  as 
will  be  apparent  from  an  examination  of  the  record. 

Never  was  an  investigation  conducted  with  greater  fair- 
ness or  generosity  to  those  concerned  nor  with  so  strict  an 
adherence  to  the  rules  of  evidence  that  would  be  applied  in  a 
court  of  law.  Every  witness  whom  the  Exchange  asked  to  have 
examined  was  called,  it  was  invited  to  submit  whatever  ques- 
tions it  desired  to  have  asked  and  all  such  questions  ivere  put 
and  every  witness  was  given  the  opportunity  to  examine  and 
correct  his  testimony  and  to  make  such  additions,  explanations 
and  statements  as  he  chose  at  the  conclusion  of  his  evidence. 
All  the  arguments  that  have  been  presented  to  you  by  the 
Exchange  in  defence  of  its  practices  w^ill  be  found  in  one 
form  or  another  in  the  record  of  those  proceedings.  Nothing 
that  Counsel  for  the  Exchange  asked  to  have  read  into  the 
record  or  asked  of  the  witnesses  (who  were  their  own  officials, 


30 


selected  by  tliem)  was  omitted.  Availing  himself  of  that 
permission,  Mr.  Sturgis  delivered  a  carefully  prepared 
Address,  which  will  be  found  at  tlie  end  of  his  testi- 
mony. I  do  not  deem  it  necessary  or  appropriate  to  enter 
upon  a  defense  of  the  fairness  of  an  Inquiry  by  a  Com- 
mittee of  the  House  of  Representatives  against  the  irre- 
sponsible and  unfounded  attacks  that  were  inspired  in  the 
public  prints.  Tlie  record  and  the  unanimity  of  the  conclu- 
sions reached  by  the  Committee  regardless  of  partisan  lines 
speak  for  themselves.  The  Exchange  had  to  say  something 
by  way  of  apology  for  the  amazing  exhibition  that  it  made 
and  this  was  all  it  had  to  offer. 

In  the  face  of  the  record  accompanjdng  the  Report  of  the 
Pujo  Committee  it  is  worse  than  idle  to  assert  that  the  Ex- 
change will  ever  be  able  to  bring  about  its  own  reformation. 
Its  unaccountable  insistence  upon  continuing  the  practice  of 
manipulating  prices  of  securities  leaves  no  room  for  argu- 
ment. The  practice  amounts  to  a  continuing  inducement  to 
the  public  to  buy  and  sell  under  false  representations. 

The  amazing  figures  presented  by  the  diagrams  at  pages 
1120-1378  of  the  Report  indicate  that  manipulation  is  the 
rule  rather  than  the  exception,  that  nothing  short  of  legal 
regulation  and  restraint  will  ever  be  effective  and  that  there 
must  be  adequate  legal  machinery  for  uncovering  the  offenses. 

A  few  further  quotations  from  the  testimonv  of  Mr. 
Sturgis  will  give  a  fair  idea  of  the  prospect  for  reform  in 
that  direction: 


K 


Q.  We  are  speakin^r  of  transactions  that  are  made  by 
members  of  your  exchange  in  the  way  of  short  selling. 
Would  not  their  books  show  whether  or  not  they  were  selling 
short  ? 

A.  If  the  broker  is  operating  for  his  own  account,  yes. 

Q.  And  you  say  from  a  quarter  to  a  half  of  the  trans- 
actions on  the  exchange  are  for  the  broker's  own  account? 

A.  We  agreed  upon  a  third,  I  think. 

Another  of  the  notorious  instances  of  manipulation 
in  the  recent  history  of  the  Exchanges  was  that  of  the 
Hocking  pool  in  1909,  of  which  the  late  James  R.  Keene 
was  manager,  the  operations  of  which  mil  be  found  described 
on  pages  47-49  of  the  Report.  Ten  Stock  Exchange  firms  par- 
ticipated in  it.  The  stock  which  was  earning  only  one-half 
of  one  per  cent  was  forced  up  from  $24  to  $92.50  per  share. 


31 


The  entire  number  of  shares  listed  was  69,304.  In  a  single 
month  (March)  when  the  pool  operations  began  143,400  shares 
were  traded  in.  Upon  the  termination  of  the  pool  the  stock 
declined  to  $2  per  share  and  then  disappeared. 

More  remarkable  even  than  the  neglect  of  the  authorities 
of  the  exchange  to  stop  this  operation  when  they  knew  it  was 
going  on,  was  the  theory  on  w^hich  they  inflicted  '*  punishment" 
after  the  pool  collapsed.  Of  the  10  firms  engaged  in  the 
pool,  only  the  three  that  failed  were  punished.  They  were  ex- 
pelled from  the  exchange.  The  others  were  neither  expelled 
nor  suspended,  but  merely  ''censured''.  Thus  the  punish- 
ment was  inflicted,  not  for  the  character  of  the  operations, 
since  all  were  equally  culpable  in  that  regard,  but  for  becom- 
ing insolvent  in  consequence  of  dealing  beyond  one's  means. 

This  was  admitted  by  Mr.  Sturgis  (R.  846) : 

Q.  I  should  like  to  know  why  you  should  expel  two  mem- 
bers of  a  pool  out  of  seven  stock  exchange  firms  for  doing 
the  same  thing  that  the  other  five  did  simply  because  those 
two  happened  to  fail  at  it. 

A.  Because  they  went  away  beyond  their  means. 

Mr.  Sturgis  further  stated  that  the  members  of  this  pool 
who  did  not  fail  were  not  punishable  under  the  constitution 
of  the  Exchange  for  the  character  of  operations  in  which  they 
engaged  and  that  he  did  not  think  they  ought  to  be  (Sturgis, 
R.,  846,  847) : 

Q.  Do  you  mean  to  say  that  the  things  these  seven  firms 
did  were  not  punishable  under  the  constitution? 
A.  No;  they  were  not  punishable. 
Q.  Do  you  not  think  they  ought  to  be? 
A.  We  have  not  thought  so  heretofore. 
Q.  Do  you  not  thmk  so? 
A.  I  do  not  think  so;  no. 

There  has  been  much  discussion  of  the  relative  merits  of 
and  objections  to  ** short  selling"  and  speculation  generally, 
on  moral  and  economic  grounds.  I  do  not  propose  to  enter 
upon  that  discussion  at  this  time. 

This    Bill    is    not    intended    to    prohibit    speculation. 

That  might  be  accomplished  by  the  Federal  Govern- 
ment by  indirection  through  the  taxing  power,  with 
ample  Constitutional  warrant  based  upon  judicial  prece- 
dents.    But  this  Bill  attempts  nothing  by  indirection.     It 


32 


33 


!■!    i 


seeks  only  to  prevent  the  use  of  the  mails,  telegraph  and  tele- 
phone in  aid  of  fictitious  transactions  and  dishonest  specu- 
lation. It  does  not  attempt  to  prohibit  short-selling.  Inso- 
far as  its  effect  is  to  limit  short-selling  the  result  is  brought 
about  incidentally  and  indirectly  through  prohibiting  prac- 
tices that  bear  directly  upon  the  integrity  of  the  quotations 
that  are  to  be  distributed  through  the  mails. 

The  following  extract  from  Mr.  Sturgis's  testimony  fair- 
ly represents  the  IStock  Exchange  view  of  short  selling  and 
the  arguments  that  are  advanced  to  support  it,  (Sturgis,  R. 
830,  831,  832,  833) : 

Q.  Certainly.    What  is  the  purpose  of  short  selling? 

A.  Generally  speaking,  to  make  a  profit. 

Q.  To  make  a  profit  by  what  process? 

A.  By  repurchasing  the  short  sale  at  a  declining  price. 

Q.  That  is,  by  selling  a  security  that  you  have  not  got 
and  gambling  on  the  proposition  that  you  can  get  it  cheaper 
and  deliver  the  thing  that  is  sold?    Is  not  that  it? 

A.  That  is  the  usual  process — selling  when  you  think  the 
price  is  too  high  and  repurchasing  when  you  think  it  has 
reached  the  proper  level. 

Q.  But  is  it,  or  not,  the  process  of  selling  a  thing  you 
have  not  got? 

A.  It  is. 

Q.  And  is  it,  or  not,  with  the  idea  that  it  will  go  lower, 
or  can  be  depressed  lower,  and  bought  cheaper  and  delivered  ? 

A.  Truly. 

Q.  Do  I  understand  that  you  regard  that  as  legitimate  and 
defensible  ? 

A.  Do  you  wish  my  personal  expression  of  opinion? 
Q.  Yes. 

A.  I  think  it  depends  entirely  upon  circumstances. 

Q.  Under  what  circumstances  would  you  regard  that  sort 
of  short  selling  as  legitimate  and  proper? 

A.  I  would  regara  it  so  if  there  was  a  panic  raging  over 
the  country  and  it  was  desirable  to  protect  interests  which 
could  not  be  sold.  I  think  it  would  be  a  perfectly  legitimate 
thing  to  do. 

Q.  Let  us  see  about  that.  If  there  was  a  panic  raging 
over  the  country  and  a  man  sold  stocks  short,  would  not  that 
simply  add  to  the  panic? 

A.  It  might.     Self-preservation  is  the  first  law  of  nature 

•     *     #     #     # 

Q.  But,  as  I  understand  it,  if  there  is  a  panic  raging  over 
the  country,  you  think  it  is  defensible  for  a  man  to  depress 
stocks  by  selling  stocks  he  has  not  got,  with  the  idea  of  adding 
to  the  panic  ? 

A.  Mr.  Untermyer,  if  a  person  has  property  which  is 
absolutely  unsalable  and  he  can,  so  to  speak,  protect  his 


position  by  selling  something  for  which  there  is  a  broad 
market 

Q.  That  he  has  not  got? 

A.   (Continuing).  I  do  not  consider  it  wrong. 

Q.  Mr.  Sturgis,  let  us  just  analyze  that,  because  I  do  not 
think  I  understand  you.  You  do  not  want  to  be  misunder- 
stood, do  you? 

A.  It  is  not  my  w^ish. 

Q.  And  I  do  not  want  you  to  be  misunderstood.  Do  you 
mean  to  say  that  if  there  is  a  panic  raging  it  is  a  defensible 
thing  for  a  man,  under  any  circumstances,  to  sell  stock  that 
he  has  not  got,  with  the  idea  of  getting  it  back  cheaper? 

A.  I  do  think  it  is  defensible.  I  certainly  think  it  is  de- 
fensible. 

Q.  For  what  purposes  does  he  do  that  except  to  try  to 

make  money? 

A.  To  try  to  save  his  credit,  perhaps. 

Q.  How  does  he  save  his  credit  in  a  panic  by  selling  stocks 
that  he  has  not  got,  wdth  the  idea  of  adding  to  the  panic 
and  getting  them  cheaper  ? 

A.  Because  if  he  can  make  a  profit  on  that  sale  it  may 
repair  the  losses  that  he  has  made  on  stocks  he  cannot  sell. 

Q.  I  see.  You  know  that  that  would  simply  accentuate 
the  fierceness  of  the  panic,  do  you  not? 

A.  It  could  not  be  otherwise. 

Q.  Certainly.  And  his  only  purpose  in  doing  a  thing  of 
that  kind  in  time  of  panic  w^ould  be  to  make  money,  would 

it  not? 

A.  To  protect  himself. 

Q.  It  would  be  to  make  money,  would  it  not  ? 

A.  Yes;  and  that  would  protect  him. 

Q.  Of  course  it  always  protects  a  man  to  make  money, 
no  matter  how  he  makes  it,  does  it  not? 

A.  Yes,  sir. 

Q.  And  that,  you  think,  is  justifiable? 

A.  I  think  under  those  circumstances  it  is. 

Q.  You  do  not  want  to  make  any  further  explanation  of 
that  proposition,  do  you? 

A.  I  do  not. 

Q.  Is  it  any  more  justifiable  for  a  man  to  sell  short  in  a 
panic  than  in  a  normal  market? 

A.  It  depends  very  much  upon  his  financial  necessities. 

Q.  Do  you  regard  it  as  justifiable  in  a  normal  market  for 
a  man  to  sell  a  thing  he  has  not  got,  with  the  idea  of  depress- 
ing prices  in  order  to  buy  in  the  stock  at  a  lower  level? 

A.  I  think  it  is  a  question  between  a  man  and  his  own 
conscience. 

Q.  I  am  asking  for  your  judgment.  You  have  been  many 
years  in  the  exchange,  and  you  are  a  careful  observer,  and 
I  would  like  to  know  your  judgment. 

A.  I  think  a  great  many  people  deprecate  it.  Others  ap- 
prove it. 

Q.  Do  you  approve  of  it? 


34 


A.  You  ask  me  personally? 

Q.  Yes. 

A.  I  never  sold  a  share  of  stock  short  in  my  life. 

Q.  Then  you  do  not  approve  of  it,  do  you? 

A.  I  just  happen  not  to  have  done  it.  My  private  busi- 
ness, if  you  please,  I  beg  you  to  omit. 

Q.  I  have  not  asked  you  your  private  business. 

A.  Yes ;  you  asked  me  what  I  did  myself. 

Q.  I  did  not  ask  you  that,  sir;  I  asked  you  what  you 
thought  about  it. 

#     *     *     •     * 

Q.  Do  you  approve  of  short  selling  in  others  ? 

A.  Under  what  conditions? 

Q.  Under  any  conditions. 

A.  Yes;  under  some  conditions. 

Q.  Do  you  approve  of  short  selling  in  a  normal  market? 

A.  I  will  answer  that  question  by  saying  it  is  a  moral 
question  with  the  individual  himself.  It  is  not  up  to  me  to 
express  my  opinion  upon  it. 

icl.  Do  you  personally  approve  of  short  selling  in  a  normal 
market  ? 

A.  Not  I,  personally;  no. 

Q.  You  do  not.  And  is  it  or  not  the  fact  that  the  bulk 
of  the  short  selling  is  done  in  a  normal  market  ? 

A.  I  should  say  no;  more  often  on  an  excited  market. 

Q.  It  is  done  every  day,  is  it  not? 

A.  Oh,  yes;  to  some  extent. 

Q.  And  it  is  done  in  large  volume,  is  it  not? 

A.  At  times. 

Q.  The  stock  exchange  does  not  discourage  it,  does  it  ? 
A.  The  stock  exchange  does  not  enter  into  it  at  all. 
Q.  The  stock  exchange  does  not  discourage  short  selling 
does  it?  ^  ^y 

A.  The  stock  exchange  takes  no  position  in  the  matter 
at  all. 

Q.  Has  the  stock  exchange  any  rule  or  regulation  against 
short  selling? 

A.  None. 

Q.  Why  is  it  not  just  as  simple  a  matter  for  them  to  have 
a  regulation  against  short  selling  as  to  have  a  regulation 
against  a  broker  splitting  his  commissions  ? 

A  There  is  no  regulation  against  short  selling;  that  is 
all  I  can  say  to  you  about  it. 

My  reason  for  declining  to  enter  upon  the  discussion  of  the 
relative  evils  and  alleged  compensating  advantages  of  specn- 
lation  and  short-selling  is  that  they  have  only  a  remote  relation 
to  the  purposes  of  this  Bill  and  I  am  anxious  that  the  real 
issues  shall  not  be  obscured.  Judging  by  the  prominence  that 
the  representatives  of  the  Exchange  have  given  to  the  dis- 
cussion of  those  purely  collateral  and  largely  academic  ques- 


35 


tions,  it  looks  as  though  they  are  anxious  to  create  a  false 
issue  by  setting  up  a  wooden  man  and  proceeding  to  knock 
him  down.  I  decline  to  follow  them  upon  that  quest,  how- 
ever tempting  may  be  the  inducements. 

This  Bill  is  aimed  at  dishonest  speculation  through  ma- 
nipulation whether  for  the  long  or  short  account.  It  is  em- 
ployed equally  to  raise  and  to  depress  prices.  The  methods 
in  both  operations  are  equally  deceptive. 

I  may  however  be  permitted  to  say  in  passing  that  the 
champions  of  short-selling  studiously  ignore  the  main  argu- 
ment againt  its  legitimacy.  They  insist  that  it  is  a  safety 
valve  against  undue  inflation  and  depression,  in  that  it  tends 
to  check  an  undue  rising  and  falling  market  in  a  security. 

It  is  said  that  the  short-seller  sells  when  in  his  judgment  a 
stock  is  too  high  and  is  compelled  to  cover  his  sale  by  bmdng 
when  it  has  reached  what  he  believes  to  be  its  real  value. 
That  sounds  well  in  theory.  In  practice  short-selling  is  a 
dangerous  factor  in  times  of  depression.  It  is  a  direct  in- 
centive toward  creating  and  accentuating  panics  in  the  secur- 
itj^  market. 

But  above  and  beyond  this,  it  is  not  in  fact  to  any  extent 
employed,  as  is  claimed,  as  a  test  of  the  value  of  a  given  secur- 
ity, and  does  not  in  practical  operation  perform  any  such 
useful  function,  except  in  rare  cases.  Speculation  is  the  main 
feature  of  the  stock  market.  The  bulk  of  its  transactions  are 
in  the  nature  of  gambling,  the  brokers  being  themselves  and 
for  their  own  account  the  chief  speculators  and  the  customers 
who  trade  through  them  buying  and  selling  from  day  to  day 
making  up  the  remaining  speculative  contingent. 

A  '' short-selling''  movement  is  not  ordinarily  directed 
against  a  particular  security  on  its  merits.  In  order  to  be 
successful  on  a  substantial  scale  it  attacks  the  entire  market. 
The  operator  sells,  without  owning,  a  number  of  the  most 
active  securities  on  the  list  without  regard  to  their  merits  or 
whether  they  are  intrinsically  worth  more  or  less  than  their 
then  selling  price.  There  is  rarely  a  substantial  selling  move- 
ment that  does  not  attack  and  depress  prices  in  the  active 
stocks  all  along  the  line.  The  market  prices  move  up  and 
down  by  sympathy.  That  being  true,  explodes  most  of  the 
fine-spun  theories  as  to  the  justification  for  short-selling  in 
fixing  and  steadying  the  value  of  a  given  security. 


36 

The  demand  of  these  gentlemen  that  they  be  further  en- 
trusted with  the  task  of  self-reformation,  is  an  unthinkable 
proposition.     If  the  practices  they  are  struggling  to  retain, 
such  as  manipulation  of  prices,  are  to  be  hereafter  prohibited 
as  unlawful,  the  suggestion  that  the  machinery  for  uncover- 
ing  the  offense  and  the  punishment  therefor  be  left  exclusive- 
ly in  their  hands  to  deal  out  justice  to  one  another  is  certainly 
unique,  to  say  the  least.    The  absurdity  of  the  contention  is 
emphasized  by  the  tenacity  with  which  they  cling  to  the  de- 
lusion that  manipulating  prices  is  legitimate  business.     Not 
more  so,  however,  than  the  further  argument  of  the  Exchange 
that  it  is  now  mending  its  ways  and  that  there  should  there- 
fore be  no  means  provided  by  the  law  for  discovering  or  pun- 
ishing future  offenses.     Truly  a  most  remarkable  process  of 
reasoning! 

If  a  member  divides  any  part  of  his  commissions  with 
his  customer  or  with  any  one  through  whom  he  secures 
business,  expulsion  and  ruin  are  the  immediate  results. 

''SpHtting  commissions  is  the  most  heinous  offense  a  mem- 
ber can  commit," 

says  Mr.  Sturgis— far  more  heinous  than  ^Svash  sales'^  or 
fraud.  One  would  imagine  that  these  gentlemen  would  have 
sufficient  sense  of  humor  to  pause  in  their  denunciation  of 
the  motives  of  those  who  have  dared  suggest  that  they  have 
not  quite  demonstrated  the  justice  of  their  demand  that  they 
be  permitted  to  continue  free  from  the  legal  regulation  and 
restraints  that  pertain  to  other  occupations  affecting  the 
public.  It  is  difficult  to  imagine  what  motives  there  could  be 
for  the  perform.ance  of  this  unpleasant  duty  other  than  the 
public  interest  and  to  promote  the  eventual  usefulness  of  this 
great  financial  agency. 

The  extreme  gravity  and  importance  to  the  public  of  the 
transactions  conducted  on  the  Exchange  are  little  understood 
outside  the  very  restricted  circle  that  has  to  do  with  large  cor- 
porate business.  Even  to  the  latter  the  mechanism  of  the  Stock 
Exchange  and  the  way  in  which  prices  are  made  are  largely  a 
closed  book.  They  are  technical  and  complicated  in  the  ex- 
treme,  which  accounts  for  the  endless  opportunities  for  mis- 
representing the  issues  and  misleading  the  public. 

Incorporation  and  rigid  regulation  of  the  Exchange  have 
become  essential  to  the  public  protection.     They  will  vast 


37 


ly  add  to  the  value  and  stability  of  meritorious  secur- 
ities and  to  the  usefulness  of  the  Exchange  as  a  legiti- 
mate and  necessary  part  of  our  financial  system  and  they 
furnish  the  only  means  of  preventing  deception  in  the  quota- 
tion, purchase  and  sale  of  securities  on  public  Exchanges.  I 
claim  that  there  can  be  no  effective  regulation  without  in- 
corporation, nor  without  the  accompanying  all-important 
power  to  .inspect  the  books  of  members  of  the  Exchange  inso- 
far as  concerns  the  transactions  on  the  Exchange.  In  mak- 
ing this  claim  it  is  not  necessary  to  impugn  the  purposes  of 
the  general  body  of  membership  of  the  Exchange.  Xor  am 
I  unmindful  of  the  efforts  that  the  Exchange,  under  the  spur 
of  the  criticism  aroused  by  these  exposures,  has  recently  been 
making  to  correct  existing  defects  in  its  management  in  cer- 
tain directions  nor  the  inherent  difficulty  in  bringing  about 
refonns,  but  the  chief  abuses  remain  and  so  it  will  continue 
until  the  law  renders  them  impossible  by  making  them  punish- 
able as  crimes  and  providing  means  for  their  discovery. 

My  contention  is  that  without  the  aid  of  incorporation 
the  Exchange  will  be  unable  to  put  an  end  to  illegitimate 
practices  and  that  the  best  element  in  its  membership,  whose 
business  does  not  depend  upon  these  practices,  should 
welcome  the  proposed  legislation  instead  of  short-sight- 
edly  arraying  itself  with  the  other  element  against  public 
sentiment  and  opposing  every  measure  that  is  intended  to 
restore  and  maintain  public  confidence,  on  the  mistaken  theory 
that  the  Exchange  must  be  permitted  to  continue  to  be  a  law 
unto  itself. 

This  contention  is  supported  by  the  judgment  of  so  eminent 
an  authority  as  Mr.  George  W.  Perkins,  who  was  for  many 
years  a  partner  in  the  firm  of  J.  P.  Morgan  &  Company.  The 
following  is  from  the  testimony  of  Mr.  Perkins  on  this  sub- 
ject before  the  Pujo  Committee  (pp.  1625-1626) : 

Q.  Have  you,  as  a  result  of  your  experience,  any  opinion 
as  to  the  necessity  or  advisability  of  puttin^r  the  stock  ex- 
change under  legal  control  and  regulating  it? 

A.  Yes. 

Q.  What  is  your  view  as  to  that,  and  what  are  the  rea- 
sons for  it? 

A.  I  feel  generally,  from  such  study  as  I  have  made  of 
that,  that  if  the  exchange  were  incorporated  under  some 
broad  system  of  regulation,  that  it  would  inure  to  the  bene- 
fit of  the  people  who  are  investing  in  securities  sold  there 
and  would  nt  once  be  better  for  the  public  who  are  the  buy- 


I 


[ 


i\ 


I 


38 


ers,  and  for  the  members  of  the  exchange  who  are  conduct- 
ing this  business. 

Q.  You  favor  the  incorporation  of  the  stock  exehan^e,  do 
you  ? 

A.  I  would;  yes. 

Q.  And  under  what  laws  do  you  favor  its  incorporation? 

A.  I  know  that  the  feeling  among  some  people  with  whom 
I  have  talked  is  that  it  should  be  incorporated  under  the 
laws  of  the  State  of  New  York.  The  New  York  Stock  Ex- 
change was  organized  a  great  many  years  ago  as  a  New 
York  enterprise,  but  personally  I  think  it  has  largely  out- 
grown that  function.  It  is  a  national  institution  now.  In 
fact,  it  is  more  than  that.     It  is  an  international  institution. 

Q.  It  is  an  international  institution? 

A.  Yes;  and  people  are  trading  in  its  securities  ^vho  are 
many  thousands  of  miles  away,  and  they  should  be  given 
all  the  protection  in  that  trading  that  it  is  possible  to  throw 
around  it.  I  believe  a  very  vast  sum  of  money  would  come 
as  an  investment  in  American  securities,  if  some  of  the  con- 
ditions in  regard  to  the  manner  in  which  they  are  traded 
m  could  be  changed  and  perhaps  improved  to  the  benefit 
at  once  of  the  exchange  and  to  purchasers. 

Q.  Is  it  your  judgment,  then,  that  it  should  be  incorporat- 
ed  under  a  Federal  law? 

A.  That  would  be  my  judgment,  if  it  could  be  so  ar- 
ranged. In  fact,  I  am  a  nationalist  on  almost  all  of  these 
questions,  not  a  State  rights  man. 

^  Q.  Does  the  stock  exchange  perform  any  important  func- 
tion in  national  finance? 

A.  I  think  it  does,  very ;  and  a  most  useful  function. 

Mr.  John  Aspegren,  President  of  the  Produce  Exchange, 
testified  as  follows  before  the  Pujo  Committee  (pp.  929-930)  .• 

Q.  Your  exchange  is  incorporated  under  the  laws  of  the 
State  of  New  York,  is  it  not? 
A.  Yes,  sir. 

Q.  Do  you  find  any  difficulty  in  doing  business  as  an  in- 
corporated exchange? 
A.  No;  we  do  not. 

Q.  Do  you  find  it  handicaps  you  in  any  of  your  lef'itimate 
operations  ?  '^ 

A.  That  depends  on  what  you  mean  by  ''legitimate"  op- 
erations. 

Q.  I  assume  your  operations  are  all  legitimate. 

A.  That  is  why  I  asked  the  question. 

Q.  It  does  not  hamper  you  in  the  pursuit  of  any  of  the 
legitimate  operations  of  the  exchange,  does  it? 

A.  It  may  bring  out  lawsuits.     I  think  we  have  had  some. 

Q.  You  mean  it  gives  a  remedy  to  people  who  claim  thev 
are  injured  by  your  acts? 

A.  That  is  exactly  it. 

A  comprehensive    understanding    of    the    complex    ma- 
chinery by  which  prices  are  controlled  is  necessary  to  form 


39 


V." 


a  judgment  on  the  question.  This  knowledge  is  of  far  greater 
importance  to  the  masses  and  in  more  ways  than  is  generally 
appreciated.  Those  who  have  never  bought  or  sold  or  owned 
a  bond  or  share  of  stock,  and  never  will,  are  as  deeply  con- 
cerned in  the  rigid  regulation  of  this  vast  instrumentality 
of  finance  as  are  those  who  deal  in  the  securities  that  are 
listed  on  the  Exchange.  Their  interest  will  be  found  not 
only  in  the  close  relation  between  fictitious  values  of  securities 
and  the  prices  of  the  commodities  of  the  Companies  repre- 
sented by  these  securities  but  in  many  public  aspects  of  the 
subject  connected  with  its  quotations  of  securities. 

But  for  the  incentives  and  opportunities  otfered  by  the 
Stock  Exchange  most  of  the  great  Trusts  would  have  been 
impossible. 

The  attraction  to  the  vendors  of  the  properties  lay  largely 
in  the  opportunity  offered  of  selling  the  securities  received 
in  payment  for  their  properties  to  the  public.  This  was 
made  possible  only  through  the  medium  of  the  Exchange. 
To  those  who  continued  to  hold  their  securities,  inflated 
prices  for  the  commodities  meant  higher  dividends,  thus 
further  increasing  the  market  values  of  their  securities; 
the  control  of  the  market  for  a  given  product  with  the  ac- 
companying power  to  levy  tribute  on  the  public  is  capitalized 
at  all  that  the  traffic  will  bear  and  the  securities  representing 
no  actual  property  and  nothing  but  this  artificial  control,  find 
a  ready  market  on  that  basis.  In  order  to  support  the  ficti- 
tious values  thus  created  that  control  must  at  all  hazards  be 
maintained. 

The  merits  of  the  controversy  over  this  question  of 
whether  the  Stock  Exchange  should  be  required  to  incorpor- 
ate and  be  subject  to  regulation  have,  with  few  exceptions, 
been  unrecognizable  from  the  newspaper  reports. 

The  Exchange  maintains  a  publicity  department  under 
the  euphonious  title  of  the  ** Library  Committee".  In 
the  course  of  the  hearings  before  your  Committee  there  was 
distributed  from  Washington  and  published  all  over  the 
countrj^  a  canard  to  the  effect  that  the  President  had  express- 
ed his  disapproval  of  the  Bill  now  under  discussion.  So  per- 
sistent  and  circumstantial  was  the  rumor  that  an  explicit  de- 
nial from  the  White  House  was  considered  advisable  to  pre- 
vent the  discrediting  of  the  legislation. 

Such    methods    are    most  unfortunate.     Thev  are  bound 


n 


40 

sooner  or  later  to  react  against  the  Exchange  and  thus  ob- 
scure the  merits  of  the  controversy,  whicJi  the  champions  of 
this  measure  are  anxious  to  have  impartially  and  imperson- 
ally discussed. 

In  answer  to  the  question:  Why  should  the  Stock  Ex- 
change be  incorporated?  We  might  with  far  greater  justice 
ask:  Wiy  should  it  not?  It  is  today  the  most  powerful  and 
far-reaching  of  all  the  instrumentalities  of  National  and  In- 
ternational finance.  Its  records,  whether  genuine  or  fictiti- 
ous, honest  or  juggled,  are  the  guides  by  which  transactions 
are  conducted  and  values  fixed  by  millions  of  people  here  and 
abroad.  Its  vast  and  delicate  machinery,  with  its  endless 
opportunities  for  the  perpetration  of  fraud  and  pillage  (un- 
fortunately too  often  accomplished  in  the  past)  should  not 
be  in  the  uncontrolled,  unregulated  and  irresponsible  power 
of  any  body  of  men,  however  unselfish  and  altruistic  may  be 
their  aims. 

Without  yielding  here  to  the  temptation  to  rehearse  the 
history  of  the  past  fifteen  years  of  the  Exchange  as  the 
instrumentality  by  which  vast  fortunes  have  been  filched 
from  the  public  through  the  absence  of  control  over  its  oper- 
ations, it  is  sufficient  to  remind  you  at  this  point  that  the  plea 
for  incorporation  and  regulation  involves  no  reflection  upon 
the  Exchange  or  its  membership. 

Why  should  any  public  utility  or  instrumentality  be  sub- 
jected to  control?  Why  should  banks,  trust  companies,  life 
and  fire  insurance  companies,  casualty,  accident,  burglary, 
insurance  and  other  industries  that  might  equally  well  be  con- 
ducted by  individuals  be  required  to  be  incorporated?  Why 
should  not  you  or  I  have  the  right  to  insure  lives  or  property 
if  we  are  considered  sufficiently*  responsible  and  otherwise  ac- 
ceptable by  those  who  are  concerned?  There  was  a  time 
when  this  was  permitted.  It  is  no  reflection  upon  your  hon- 
esty or  mine  that  these  things  are  no  longer  tolerated  in 
any  civilized  country. 

Why  should  auctioneers  who  buy  and  sell  any  kind  of 
personal  property,  except  securities,  require  licenses  and 
have  their  books  of  account  and  all.  their  transactions  sub- 
ject to  public  inspection,  whilst  the  brokers  who  deal  in  se- 
curities are  free  from  such  inspection?  Is  not  such  a  bro- 
ker an  auctioneer  in  the  largest  and  broadest  sense?  How 
does  a  manipulated  stock  transaction  differ  from  anv  other 


41 

kind  of  mock  auction?  You  imagine  that  you  are  purchasing 
in  an  open  competition  in  which  true  values  are  fixed  when  in 
fact  the  cards  have  been  stacked  against  you. 

Why  are  the  books  of  employment  agencies,  hotels, 
boarding  houses,  etc.,  now  required  by  law  to  be  subject  to 
public  inspection?  W^hy  are  barbers,  plumbers,  pharmacists, 
liquor  dealers,  warehousemen,  steamship  ticket  agents,  pub- 
lic accountants  and  innumerable  other  occupations  required 
to  be  licensed  and  regulated? 

I  mean  no  disrespect  to  the  calling  of  the  stock  broker 
and  suggest  no  comparison  except  in  the  principle  involved 
in  asking  why  the  pawnbrokers  should  be  open  to  the  inspec- 
tion of  the  public  authorities  if,  as  is  now  claimed,  there  is 
no  power  to  compel  the  transactions  of  brokers  on  an  open 
board  to  be  subjected  to  examination  by  State  or  Federal  au- 
thority. There  is  no  argument  in  support  of  the  Constitu- 
tional power  in  the  one  case  that  does  not  apply  to  the  other. 
They  are  all  conducting .  legitimate  business,  but  the 
right  to  regulate  them  like  that  of  dozens  of  other  industries 
that  might  be  named,  is  recognized.  Their  occupations  may 
be  more  humble  than  that  of  the  stock  broker  in  the  sense 
that  the  transactions  may  not  be  of  such  magnitude,  but  they 
are  quite  as  legitimate. 

It  was  suggested  on  the  hearing  that  as  everybody 
in  business  uses  the  mails  the  argument  in  favor  of  re- 
quiring the  Stock  Exchange  to  incorporate  under  a  form  of 
charter  to  be  dictated  by  Congress  might  be  urged  with  equal 
force  against  all  business,  thus  interfering  with  the  sover- 
eignty of  the  States  in  the  granting  of  charters  and  by  indi- 
rection transferring  this  power  to  the  Federal  Government. 

The  answers  to  this  suggestion  may  be  summarized  as 
follows : 

1.  The  Bill,  as  before  stated,  does  not  prescribe  the  form 
.  of  charter  except  insofar  as  necessary  to  protect  the  mails 

acrainst  beinp:  used  as  the  agency  for  the  perpetration  of 
frands  upon  the  people  of  the  eonntry.  In  all  that  pertains 
to  the  internal  management  of  the  corporation,  its  powers, 
restrictions  and  obligrations,  the  State  writes  its  own  charter. 
All  that  Congress  asks  is  that  the  State  shall  give  to  the 
Federal  Government  the  assurance  of  State  supervision  and 
such  protection  as  Conofress  resrards  as  essential  to  ihe  proper 
use  of  the  mails  and  teleo^raph. 

2.  Congress  wonld  have  the  right  if  it  saw  fit  to  ^o  much 
further  and  to  demand  that  the  Exchange  take  out  a  Fed- 
eral charter  or  license  as  a  condition  of  using  the  mails  for 


>, 


1 


42 


I 


purposes  of  such  far-reaching  importance  and  involving 
such  potentiahties  of  national  injury.  The  Stock  Exchanges 
ot  New  ^ork,  Boston  and  Chicago  are  institutions  of  Na- 

Ivn  1  r^^l^^^  ^^^^  ^^  ^^^*^  concern.  Congress  has  by  this 
J^ill  lett  their  government  to  the  State  when  it  might  justly 
have  itself  assumed  control. 

3.  If  the  necessity  for  regulation  that  is  here  shown  to 
exist,  could  be  established  with  respect  to  any  other  business 
It  would  be  not  only  the  right  but  the  duty  of  Congress  like- 
wise to  protect  the  mails  from  being  made  the  agency  for 
the  perpetration  of  fraud.  The  provision  of  the  Sherman 
Law  for  the  seizure  and  confiscation  of  the  goods  of  an  un- 
lawful combination  in  interstate  transit  is  an  instance  of 
the  exercise  of  that  power.  The  Pure  Food  Law  is  another. 
Whether  it  is  advisahle  for  Congress  to  exercise  its  author- 
ity in  a  given  case  is  a  question  for  it  to  determine  but 
the  existence  of  the  power  to  exclude  from  the  mails  mat- 
ter that  IS  not  safeguarded  in  the  manner  that  Congress  may 
deem  necessary,  cannot  be  open  to  question.  It  may  say 
tomorrow  that  the  results  of  horse  races  shall  not  in  any 
event  be  carried  by  the  mails  or  over  the  telegraph  or  that 
they  shall  be  carried  only  where  the  races  are  run  under 
the  control  of  corporations  expressly  chartered  by  the  State 
and  where  gambling  is  not  permitted. 

The  Federal  Government  is  not  bound  to  permit  its 
agencies  and  facilities  to  be  used  for  purposes  that  Congress 
believes  to  be  immoral  or  fraudulent.  So  long  as  every  State 
and  every  citizen  receives  equal  treatment  there  is  no  ground 
for  complaint. 

4  There  is  no  way  of  enforcing  uniformity  of  regulation 
with  respect  to  the  conditions  on  which  the  mails  and  tele- 
graph shall  be  used  by  the  Exchanges  for  the  distribution 
ot  quotations  except  by  Federal  law  which  shall  prescribe 
in  that  respect  in  their  charters  the  conditions  under  which 
securities  are  to  be  listed,  quoted  and  dealt  in.  The  alter-  • 
native  is  as  between  State  and  Federal  incorporation  of  the 
Exchange.  To  require  Federal  incorporation  would  involve 
placing  the  internal  management  of  the  Exchanges  under 
Federal  control,  which  is  neither  necessary  nor  advisable. 
To  attempt  regulation  without  incorporation  would  impose 
upon  the  Federal  Government  the  unwelcome  and  unwise 
task  of  supervising  the  listing  applications  of  intra-state  as 
well  as  mter-state  corporations  the  quotation  of  the 
securities  of  which  are  being  distributed  through  the  mails, 
all  of  which  is  avoided  and  properly  left  to  the  jurisdiction 
of  the  State  under  this  Bill. 

The  reasons  in  favor  of  regulation  and  control  of  the  Ex- 
change are  vastly  more  weighty  than  those  appertaining  to 
any  of  the  above-enumerated  occupations  that  are  now  regu- 
lated and  controlled.  The  Exchange  is  in  no  sense  a  private 
or  local  enterprise.  It  is  grossly  misleading  to  say,  as  has 
been  argued  by  the  defenders  of  its  present  irresponsible 


43 


I 


form  of  association,  that  it  is  not  engaged  in  business  and 
that  its  only  function  is  to  provide  a  meeting-place  where  its 
members  may  deal  with  one  another  under  prescribed  rules. 

The  Exchange  is  engaged  in  business  and  of  a  highly 
important  and  distinctly  National  character.  It  owns  the 
entire  stock  of  the  New  York  Quotation  Co.,  which 
for  a  specified  rental,  supplies  members'  offices  south 
of  Chambers  Street,  New  York  City,  with  a  ticker  service 
that  registers,  impartially  and  without  ear-marks,  every 
genuine  and  manipulated  transaction  that  takes  place  on 
the  floor  of  the  Exchange.  For  $100,000  a  year,  under  con- 
tract terminable  upon  one  day's  notice,  it  sells  these  quota- 
tions to  a  subsidiary  of  the  AVestern  Union,  the  Gold  &  Stock 
Telegraph  Co.,  which  also  maintains  a  like  ticker  service.  The 
latter,  however,  can  supply  the  quotations  to  such  persons 
only  as  the  Exchange  approves,  and  under  no  circumstances 
to  members'  offices  south  of  Chambers  Street  or  to  any  com- 
peting Exchange  in  New  York  City.  The  quotations  are  gath- 
ered upon  the  floor  of  the  Exchange  by  its  employees  and 
transmitted  by  its  own  operators  to  the  officers  of  the  New 
York  Quotation  Co.,  and  the  Gold  &  Stock  Co.  and  thence  dis- 
tributed throughout  the  United  States,  but  the  Exchange  re- 
tains the  right  to  determine  absolutely  who  shall  and  who  shall 
not  receive  these  quotations.  There  is  no  other  method  by 
which  quotations  of  transactions  on  the  Exchange  are  obtain- 
able. 

It  is  the  market  place  of  the  entire  country  and  of  foreign 
countries  for  securities  and  the  only  public  market  in  the 
United  States  where  money  is  loaned  and  borrowed. 

The  business  transacted  by  its  members  has  no  relation 
to  State  lines.  It  comes  to  them  from  almost  every  corner 
of  the  civilized  world.  It  is  not  onlv  nation-wide,  but  inter- 
national  in  scope.  Its  members  maintain  private  wires  to  all 
the  principal  Cities  of  the  United  States  and  the  transactions 
conducted  on  this  open  Board  are  for  the  account  of  customers 
from  all  parts  of  the  country  and  from  foreign  countries. 

Its  hall-mark  as  to  the  genuineness  of  a  certificate  of  in- 
terest in  a  corporation  passes  current  everywhere  and  it  is 
rightly  supervised  with  jealous  care  and  at  considerable  ex- 
pense to  the  corporations  concerned. 

It  undertakes  to  prescribe  the  form  and  conditions  of 
every  corporate  security  in  which  it  authorizes  dealings  and 


ii 


44 

its  determination  is  final  through  its  control  over  the  listing 

of  such  securities.    It  reserves  the  right  to  exact  the  minutest 

details  of  the  business  and  affairs  of  the  issuing  corporation, 

to  impose  its  will  in  the  matter  of  the  procedure  by  which 

such  corporation  shall  declare  and  pay  interest  and  dividends 

and  in  the  matter  of  the  transfer  agents  and  registrar  and  as 

regards  endless  other  details;  all  this  very  properly  on  the 

ground  that  it  is  performing  a  public  function  national  in  its 
scope. 

It  jealously  controls  the  reports  of  every  transaction  on 
its  floor,  issues  and  distributes  the  records  of  every  purchase 
and  sale,  or  offer  of  purchase  and  sale,  which  it  thereby  im- 
pliedly represents  as  an  honest  and  genuine  transaction. 
Courts  of  Justice,  Trustees,  financial  institutions,  tax  officials. 
State  Superintendents  of  Banks,  Trust  Companies  and  Life 
Insurance  Companies  and  other  corporations  that  are  subject 
to  supervision  in  the  several  States  throughout  the  country 
and  the  Comptroller  of  the  Currency  in  fixing  the  value  of 
securities  of  National  Banks,  and  the  public  the  world  over, 
act  on  this  information.  It  exacts  compensation  for  the  serv- 
ice of  listing  securities,  sells  the  quotations  to  interstate  and 
international  telegraph  companies  for  large  sums  of  money 
and  scatters  them  broadcast  through  the  newspapers,  over  the 
telephone  and  telegraph,  but  always  under  its  control. 

In  the  face  of  this  array  of  undisputed  facts,  this  stupen- 
dously powerful  National  and  International  agency  of  finance 
contends  that  it  would  not  be  a  reasonable  or  legitimate  exer- 
cise of  the  power  of  Congress  to  prevent  the  use  of  the  mails, 
telephone  and  telegraph  in  interstate  business  as  a  means  of 
perpetrating  frauds  upon  the  public.  Congress  not  onlv  has  the 
unquestioned  power— it  has  become  an  imperative  duty.  It  is 
a  necessity  of  modern  finance  from  which  there  is  no  escape. 
It  IS  far  more  important  than  the  power  now  exercised  by  the 
Post  Office  Department  over  letters  and  prospectuses  that  are 
circulated  through  the  mails,  under  which  there  have  of  recent 
years  been  so  many  wholesome  convictions  for  fraudulent  use 
of  the  mails. 

Regulation  through  incorporation  is  not  only  needed  as  a 
preventive  of  fraud.  It  will  accomplish  still  greater  results 
as  a  constructive  measure. 

Great  and  much-needed  reforms  in  the  organization  and 
methods  of  our  corporations  may  be  legitimately  worked  out 


45 

through  the  power  wielded  by  the  Stock  Exchange  over  the 
listing  of  securities.  Much  of  the  confusion  and  many  of  the 
defects  in  corporate  regulation  due  to  the  diversity  of  State 
laws  and  to  the  bidding  of  the  States  against  one  another  in 
laxity  of  administration  in  order  to  attract  corporations  with- 
in their  borders  may  be  corrected  and  uniformity  of  methods 
introduced  through  the  Listing  Department  of  the  Exchange. 
Thus  complete  publicity  as  to  all  the  affairs  of  a  corpora- 
tion may  be  uniformly  enforced.  It  may  and  should  require 
as  a  condition  of  listing  a  security  that  all  the  intermediate 
profits  and  commissions  of  bankers,  brokers  and  middlemen 
shall  be  fully  disclosed,  thus  throwing  about  the  investor  the 
protection  afforded  by  the  ** Companies  Act''  of  Great  Britain 
and  of  other  civilized  countries.  Every  new  security  should 
be  required  to  be  publicly  issued  and  offered  to  the  public 
through  the  publication  of  a  prospectus  so  as  to  eliminate  the 
secret  profits  of  the  middleman  as  far  as  possible.  It  is  the 
only  way  to  create  confidence  in  and  to  popularize  investments 
in  corporate  securities. 

Detailed  annual  statements  should  be  exacted  from  all  cor- 
porations whose  securities  are  listed,  disclosing  all  pajTuents 
made  or  profits  or  emoluments  received,  directly  or  indirectly, 
by  officers,  directors,  bankers  and  brokers  from  the  corpora- 
tion, so  that  every  security  holder  may  know  whether  and  to 
what  extent  his  Company  is  being  exploited. 

The  scandalous  practices  of  officers  and  directors  in  spec- 
ulating upon  inside  and  advance  information  on  the  action  of 
their  corporations  may  be  curtailed,  if  not  stopped,  by  re- 
quiring that  the  officers  shall  make  full  disclosure  of  all  their 
transactions  in  buying  and  selling  securities  of  their  Com- 
panies. The  Act  incorporating  the  Exchange  should  provide 
that  all  statements  required  to  be  made  by  corporations  shall 
be  under  oath  and  that  false  swearing  shall  constitute  perjury. 
At  present  they  are  extra-judicial. 

In  short,  the  opportunities  of  the  Exchange  as  an  agency 
of  corporate  reform  are  almost  endless,  provided  its  owti 
practices  can  be  reformed  so  as  to  entitle  it  to  exercise  these 
broad  powers.  Instead  of  the  investment  business  of  the 
country  abandoning  the  Exchange  as  is  now  and  has  been  to 
an  extent  the  case  for  some  time  past,  it  will  become  neces- 
sary to  the  reputation  and  saleability  of  a  security  that  it 
should  be  listed  by  reason  of  the  protection  thereby  afforded 


% 


\ 


46 


II 


the  investor.  The  general  public,  which  has  grown  to  look 
upon  the  Exchange  with  distrust  because  of  the  practices 
that  have  been  tolerated  in  the  past,  will  be  given  new  confi- 
dence in  it  when  it  is  under  legal  supervision. 

The  argument  as  to  the  effect  of  this  legislation  in  en- 
larging the  usefulness  of  the  Exchange  has  been 
referred  to  as  an  admission  that  the  ultimate  pur- 
pose is  to  secure  publicity  and  uniformity  in  cor- 
porate transactions  and  general  corporate  reform  through 
the  use  of  the  Post  Office  Department.  It  is  noth- 
ing of  the  kind,  although  it  would  not  be  a  misfortune  if  it 
should  indirectly  lead  to  uniformity  in  requiring  publicity 
of  the  affairs  of  corporations  and  to  restricting  the  bidding  of 
the  States  against  one  another  in  laxity  of  administration. 
If  it  incidentally  reduces  the  incentives  for  the  organiaztion 
of  ^^ carpet-bag'^  and  *^ wild-cat''  corporations  it  will  hardly 
be  objectionable  on  that  ground  if  it  is  otherwise  a  legitimate 
exercise  of  power. 

It  is  as  essential  to  protect  the  mails  against  being  used 
as  an  agency  for  facilitating  the  perpetration  of  fraud  to  re- 
quire that  the  public  market  whose  quotations  are  to  be  car- 
ried by  the  mails  shall  be  restricted  to  the  listing  of  securi- 
ties that  conform  to  given  requirements  of  publicity  of  their 
affairs  as  it  is  that  the  quotations  of  those  securities  shall 
represent  only  actual  and  not  fictitious  or  manipulated  trans- 
actions. 

There  is  no  ulterior  purpose  in  the  first  requirement,  even 
though  it  may  serve  another  useful  purpose.  The  intended 
protection  of  the  public  cannot  be  secured  without  compliance 
with  both  requirements. 

The  principal  objection  urged  by  the  Exchange  against 
incorporation  is  that  it  mil  interfere  with  its  power  of  disci- 
pline over  Its  members  and  thus  lower  the  existing  standard 
which  It  is  claimed  can  only  be  maintained  by  reposing  un- 
questioned and  summary  final  authority  in  the  Board  of 
(jrovernors. 

No  such  interference  in  the  internal  affairs  of  the  Ex- 
change is  involved.  As  before  stated,  this  Bill  does  not  un- 
dertake to  deal  with  the  form  of  charter  or  conditions  of  mem- 
bership. The  State  will  preserve  the  present  power  of  dis- 
ciplme  if  m  its  wisdom  that  is  deemed  to  be  for  the  general 
interest.    So  it  will,  if  it  sees  hi,  permit  the  Exchange  to  re- 


47 

tain  its  present  limit  of  membership  and  its  right  to  require 
that  its  members  charge  a  uniform  rate  of  commission. 
These,  among  other  things,  are  matters  with  which  Congress 
has  no  concern.  I  have  never  been  able  to  persuade  myself 
of  the  sincerity  of  this  plea  against  incorporation.  There 
is  no  difference  between  the  power  of  discipline  that  may  be 
enforced  over  the  members  of  an  incorporated  and  unincor- 
porated body.  It  all  depends  upon  the  form  of  the  charter. 
There  are  incorporated  clubs  in  all  the  States  that  have  the 
power  of  discipline  now  enjoyed  by  the  Exchange.  Is  it  not 
more  likely  that  the  fear  of  incorporation  is  based  upon 
the  possible  interference  hereafter  by  the  State  with  the  limi- 
tation of  membership  or  with  the  maintenance  of  the  present 
enforced  rate  of  commission!  It  cannot  be  based  on  Con- 
gressional action  since  Congress  does  not  assume  to  deal  with 
that  question. 

In  connection  with  the  much-discussed  necessity  of  abso- 
lute and  unreviewable  control  of  the  Exchange  over  the  dis- 
cipline of  members  it  may  however  be  said  here  parenthetical- 
ly that  the  discipline  maintained  under  freedom  from  gov- 
ernmental supervision  has  not  been  of  such  character  as  to 
constitute  a  very  convincing  argument  in  favor  of  the  contin- 
uance of  such  despotic  and  unreviewable  power.  An  exam- 
ination of  the  record  of  punishments  inflicted  which  will  be 
found  among  the  Exhibits  accompanying  the  Report  of  the 
Pujo  Committee  furnishes  forcible  reasons  in  favor  of  the 
wisdom  and  necessity  of  judicial  review.  The  offense  most 
severely  punished  is  the  splitting  of  commissions  or  any  in- 
fraction of  the  uniform  commission  rule.  Fraudulent  and 
fictitious  transactions  by  which  the  public  has  been  grossly 
swindled  on  an  enormous  scale  and  which  have  brought  the 
Exchange  into  world-wide  disrepute  have  been  treated  as 
mere  venal  offenses  beside  the  crime  of  allowing  a  customer 
part  of  the  commission. 

Manipulation  is  considered  legitimate  provided  commis- 
sions are  paid  at  both  ends  of  the  manipulated  transaction. 

Notwithstanding  these  peculiar  views  of  the  duty  of  the 
Exchange  to  the  public  it  urges  the  importance  of  its  unre- 
stricted control  over  the  discipline  of  its  members  as  the 
sole  reason  why  it  should  not  be  forced  to  incorporate.  Some 
would  regard  it  as  an  added  reason  in  favor  of  incorporation. 
It  is  not  apparent  why  such  results  in  the  way  of  the  dis- 


V] 


1 

1 


I. 


48 


ruption  of  discipline  as  have  been  suggested  by  the  Exchange 
should  follow  from  giving  an  accused  -member  whose  repu- 
tation and  entire  business  career  and  means  of  livelihood  de- 
pend on  the  action  of  his  co-members  and  competitors,  the  or- 
dinary measure  of  justice  of  a  right  to  review  by  an  im- 
partial authority.  There  is  no  danger  that  the  Courts  will 
deal  less  severely  or  less  effectually  than  has  the  Exchange 
with  the  frauds  practiced  upon  the  public  which  it  is  the 
purpose  of  incorporation  and  regulation  to  prevent  and  pun- 
ish. That  would  be  difficult.  Nor  are  they  likely  to  regard 
manipulation  with  any  less  disfavor  than  the  spokesmen  of 
the  Exchange,  who  have  steadily  insisted  on  attempting  to  de- 
fend and  justify  such  practices  by  arguments  that  are  sur- 
prising for  their  speciousness  and  lack  of  understanding  of 
the  public  aspects  of  the  business  of  the  Exchange.  These 
are  however  as  before  stated  matters  for  the  State  to  de- 
termine. 

It  is  next  suggested  that  if  there  is  to  be  incorporation  it 
should  be  left  entirely  to  State  authority  and  that  the  Federal 
government  should  not  exact  it  or  have  anything  to  do  with  it. 
Yet  when  the  former  was  attempted  it  was  opposed  with  equal 
bitterness,  apart  from  the  fact  that  efforts  at  State  legislation 
have  proven  a  farce,  as  will  be  hereafter  seen.  There  can  be 
no  efficient  relief  from  that  direction. 

It  ivoidd  he  manifestly  unjust  to  have  one  set  of  conditions 
on  ivhich  the  New  York  Stock  Exchange  coidd  use  the  mails 
and  another  or  none  for  the  Boston,  Chicago,  Denver  or  San 
Fra7icisco  Exchange.     Uniformity  of  regulation  is  essential 

Boston  and  Chicago  should  no  more  than  New  York  be  per- 
mitted to  prey  upon  the  country  because  their  respective 
States  do  not  see  fit  to  restrict  them.  That  seems  to  me  in 
and  of  itself  a  conclusive  answer  to  the  suggestion  that  each 
State  should  be  left  to  determine  whether  the  public  market 
whose  quotations  are  to  have  the  use  of  the  mails  shall  be 
subject  to  or  free  from  supervision.  The  Federal  Govern- 
ment is  vitally  interested  in  that  question. 

The  two  fundamental  reasons  in  addition  to  a  number 
of  subsidiary  ones,  for  requiring  the  incorporatiofi  of  the 
Stock  Exchange,  may  be  recapitulated  as  follows: 

1.  To  prevent,  detect  and  punish  the  practice  of  frauds 
upon  the  public  through  manipulation,  matched  orders,  wash 


49 

sales  and  like  fictitious  transactions,  by  means  of  which  ap- 
parent values  are  created  for  securities  in  the  world's  mar- 
kets. 

This  can  only  be  accomplished  through  incorporation  and 
the  accompanying  delegation  to  public  authority  of  the  right 
to  examine  the  hooks  of  memhers,  through  which  alone  these 
transactions  are  discoverable. 

The  State  and  the  Nation  have  each,  separately  and 
independently,  the  unquestioned  right  to  safeguard  the  public 
against  imposition  on  a  subject  that  so  nearly  affects  the  in- 
terests of  all  its  citizens.  Neither  is  bound  to  permit  an  in- 
stitution so  pre-eminently  public  in  its  character  and  so 
vitally  affecting  the  financial  interests  of  the  entire  country 
and  of  other  countries  to  remain  uncontrolled.  Such  regula- 
tion ihvolves  no  attempt  to  interfere  with  the  individual  in 
buying  and  selling  securities  except  in  a  public  market.  Its 
purpose  is  to  secure  fair  dealing  in  such  a  market.  No  one 
need  become  a  member  of  such  a  corporation ;  but  if  as  a  con- 
dition of  membership  the  law  requires  that  his  books  shall  be 
subject  to  inspection,  none  of  his  Constitutional  rights  are 
violated  nor  is  it  an  interference  with  such  rights  to  prohibit 
the  individuals  engaged  in  that  calling  from  combining  for 
the  creation  and  operation  of  such  a  public  market  except 
through  incorporation  and  under  snch  regulations  as  the 
State  or  Nation  may  prescribe. 

At  the  1913  session  of  the  Legislature  of  the  State  of  New 
York,  following  the  disclosures  of  the  Pujo  inquiry,  a 
number  of  Bills,  were  passed  that  were  supposed  to  be  in- 
tended to  meet  some,  but  by  no  means  all,  of  the  existing 
evils.  The  extent  of  the  power  of  the  Exchange  may  be 
faintly  gathered  from  the  fact  that  never  in  its  entire  history 
and  notwithstanding  the  scandals  of  all  the  past  years  in  its 
management  was  there  any  attempt  to  legislate  on  the  sub- 
ject until  the  exposure  of  its  methods  brought  the  people  face 
to  face  with  the  conditiqns  that  had  been  so  long  tolerated. 

The  Stock  Exchange  points  to  these  belated  Bills  as  dem- 
onstrating that  incorporation  is  not  now  necessary  in  order 
to  regulate  the  Exchange. 

I  consider  none  of  them  as  of  any  value.  Only  the  bills 
to  which  the  Exchange  consented  were  passed.  None  of  them 
meets  or  even  attempts  to  deal  with  the  worst  evils  under  the 
present  system.  A  Bill  to  require  incorporation  was  defeated, 
as  it  deserved  to  be.    I  opposed  it  as  a  mere  '*  blind,"  as  are 


r 


50 


I 


those  that  were  passed.  The  only  relatively  important  Bill 
passed  is  that  which  purports  to  prevent  manipulation— but 
it  does  no  such  thing.  It  will  serve  only  to  legalize  and  per- 
petuate the  existing  abuse  by  excluding  it  from  the  definition 
which  should  include  it. 

The  Bill  reads  as  follows : 

Manipulation  of  securities.  Any  person  who  inflates,  de- 
presses, or  causes  fluctuation  in,  or  attempts  to  inflate,  de- 
press or  cause  fluctuations  in,  or  combines  or  conspires  with 
any  other  person  or  persons  to  inflate,  depress  or  cause 
fluctuations  in,  the  market  prices  of  the  stocks,  bonds  or 
other  evidences  of  debt  of  a  corporation,  company  or  asso- 
ciation, or  of  an  issue  or  any  part  of  an  issue  of  the  stock, 
bonds  or  evidences  of  debt  of  a  corporation,  company  or  as- 
sociation, by  means  of  pretended  purchases  and  sales  thereof, 
or  by  any  other  fictitious  transactions  or  devices,  for  or  on 
account  of  such  person  or  of  any  other  person,  or  for  or  on 
account  of  the  persons  so  combining  or  conspiring,  where- 
by, either  in  whole  or  in  part,  a  simultaneous  change  of 
ownership  of  or  interest  in  such  stocks,  bonds  or  evidences 
of  debt,  or  of  such  issue  or  part  of  an  issue  thereof,  is  not 
effected,  is  guilty  of  a  felony,  punishable  by  a  fine  of  not 
more  than  five  thousand  dollars  or  by  imprisonment  for  not 
more  than  two  years,  or  by  both. 

A  pretended  purchase  or  sale  of  any  such  stocks,  bonds 
or  other  evidences  of  debt  whereby,  in  whole,  or  in  part,  no 
simidtaneous  change  of  ownership  or  interest  therein  is  ef- 
fected, shall  be  prima  facie  evidence  of  the  violation  of  this 
section  by  the  person  or  persons  taking  part  in  the  transac- 
tion of  such  pretended  purchase  or  sale. 

{The  italics  are  ours,) 

This  Bill  stands  in  the  way  of  effective  legislation  to  pre- 
vent manipulation  and  that  is  precisely  what  it  was  intended 
to  do. 

Manipulation  of  securities  is  not  accomplished  to  any 
appreciable  extent  by  fictitious  transactions.  As  now  prac- 
ticed upon  the  Exchange  it  does  result  in  a  change  of  own- 
ership, so  that  the  most  widespread  forms  of  manipulation 
practiced  on  the  Exchange  are  not  reached  by  this  Bill. 

When  a  banker  or  a  broker  wants  to  create  a  fictitious 
appearance  of  activity  in  a  given  security  for  the  purpose  of 
stimulating  dealings  in  it  or  to  advance  or  depress  the  market 
price,  he  no  longer  does  it  through  matched  orders  or  washed 
sales.  He  gives  at  the  same  time  to  a  number  of  different 
brokers  orders  day  by  day— and  sometimes  hour  by  hour— 
to  sell  the  security  on  a  scale  either  up  or  down,  dependent 
on  whether  he  wants  to  advance  or  depress  the  price;  and 


51 


he  gives  at  the  same  time  and  as  part  of  the  same  operation  to 
another  set  of  brokers  orders  to  sell  on  a  scale.  These  brokers 
are  not  supposed  to  know— and  often  do  not  know— of  the 
counter-orders  that  have  been  given.  The  effect  of  these 
transactions  is,  however,  to  create  a  nominal  change  of  owner- 
ship accompanying  every  transaction  and  yet  at  the  end  of 
the  day  the  operator  has  probably  neither  bought  nor  sold  the 
stock  on  general  balance  although  the  records  and  quotations 
of  the  transactions  as  published  and  scattered  throughout  the 
country  will  show  great  apparent  activity  and  heavy  dealings 
and  rising  or  falling  prices  when  there  have  been  in  fact  no 
dealings  other  than  those  of  this  operator  on  both  sides  of 
the  market,  except  the  purchases  and  sales  of  such  victims 
and  the  gambling  transactions  of  such  ^'room  traders"  as 
have  been  attracted  to  the  stock  by  this  false  appearance  of 

activity. 

The  violent  protest  that  was  made  before  you  of  the  defini- 
tion of  ** manipulation"  contained  in  subsection  (a)  of  Sec- 
tion 5  of  this  Bill  is  easily  understandable  in  the  light  of  this 
explanation.  Your  especial  attention  is  invited  to  that  defini- 
tion. Is  there  anything  in  it  that  would  apply  to  an  honest 
transaction?  Or  to  which  there  would  or  could  be  objection 
if  the  members  of  the  Exchange  were  not  determined  to  cling 
to  these  illegitimate  methods  just  as  they  clung  to  the  dis- 
graceful practice  of  permitting  dealings  in  ** blind  pools" 
under  the  guise  of  their  ** Unlisted"  Department  until  1910! 

This  provision  forbids  only  transactions  that  are  made 
for  the  purpose  of  giving  a  false  appearance  of  activity  or 
of  artificially  influencing  the  market  in  order  to  buy  or  sell 
or  to  attract  public  attention  so  as  to  induce  purchases  and 

sales  by  others. 

Why  should  there  be  such  a  storm  of  opposition  to  for- 
bidding such  practices! 

No  law  will  reach  these  transactions  unless  the  Exchange 
is  subjected  to  legislative  control  through  incorporation,  with 
the  right  to  some  public  authority  to  examine  the  hooks  of  its 
members.  The  mere  existence  of  such  authority  will  in  and 
of  itself  be  a  powerful  deterrent.  In  view  of  the  concession 
that  at  least  one-third  of  all  the  transactions  are  those  of 
members  themselves  for  their  own  account  and  of  the  statistics 
showing  that  upwards  of  80%  are  purely  speculative  there 
would  appear  to  be  urgent  need  of  every  deterrent  that  can 
be  lawfully  applied.    If  you  want  almost  ocular  demonstra- 


I 


i 


I 


t 


52 

tion  of  the  processes  and  baneful  results  of  manipulatioD 
to  the  extent  of  hundreds  of  millions  of  dollars  within  a 
few  months  look  at  the  sheets  and  diagrams  showing  the 
trend,  character  and  extent  of  the  dealings  in  Amalgamated 
Copper  Company  during  the  period  between  December,  1906, 
and  October,  1907,  to  which  reference  has  elsewhere  been 
made. 

In  those  eleven  months  there  were  over  thirty-two  million 
shares  dealt  in  of  a  Company  that  had  only  one  and  one  half 
million  shares.  Stated  in  dollars  the  dealings  in  that  eleven 
months  in  that  one  security  amounted  to  over  three  billion 
dollars.  Look  also  at  the  range  of  prices.  On  a  single  day 
(March  15th,  1907)  there  were  2,147,005  shares  sold— which 
was  one  and  one  half  times  the  entire  capital.  Or  still  more 
instructive,  look  at  its  record  between  June,  1901,  and  No- 
vember, 1903,  when  the  price  went  from  $130  to  $35  per  share 
and  again  the  capital  was  bought  and  sold  many  times  over 
and  over  again  each  year. 

An  examination  of  the  charts  and  statistics  of  other  Com- 
panies, such  as  Reading  and  U.  S.  Sieel,  tell  the  same  story. 
The  same  old  game  is  repeated  over  and  over  again  by  **  in- 
siders'' operating  through  pools  and  syndicates  in  the  man- 
ipulation of  vast  blocks  of  securities,  either  forcing  the  prices 
up  and  unloading  them  on  the  public  or  forcing  them  down 
to  shake  out  the  public  preparatory  to  another  raid. 

It  is  a  notorious  fact  that  James  R.  Keene,  who  managed 
the  ill-fated  Hocking  pool,  was  employed  to  manage  and  that 
he  in  fact  conducted  pool  operations  in  Amalgamated  Copper 
and  U.  S.  Steel  stocks  through  market  manipulations. 

If  the  average  human  mind  that  has  not  been  steeped  in 
the  intricacies  of  high  finance  can  realize  the  magnitude  of 
these  transactions  your  attention  is  directed  to  that  end  to 
the  figures  showing  the  dealings  in  the  securities  of  these  two 
companies. 

In  1906  and  1907  there  were  in  all  1,400,000  shares  of 
Reading  Common  stock  listed.  There  were  over  eighty-one 
million  shares  sold  in  that  time,  starting  at  $164  per  share 
and  ending  at  $90.  Those  transactions  represented  over 
eleven  billion  dollars  in  money  in  sales  and  the  same  amount 
in  purchases. 

In  U.  S.  Steel  with  5,084,000  shares  of  common  stock  out- 
standing there  were  74  million  shares  sold  and  the  same  num- 


53 

"ber  bought  in  1909  and  1910.    In  a  single  month  (January, 
1910)  there  were  over  6  million  shares  sold. 

It  will  be  said  that  this  largely  represents  speculation. 
But  is  it  honest  speculation  or  speculative  excitement  brought 
about  by  pool  manipulation?  What  part  of  it  is  pure  manipu- 
lation? 

Here  again  there  have  been  selected  by  way  of  object-les- 
son only  a  few  of  the  instances  that  might  be  multiplied  but 
prominent  cases  have  been  taken  to  illustrate  the  point.  Un- 
less these  practices  are  made  discoverable  and  punishable 
there  is  no  reason  why  they  should  not  be  repeated  when  con- 
ditions are  again  favorable. 

Many  of  our  great  fortunes  have  been  amassed  by  these 
methods.  Who  first  knew  when  U.  S.  Steel  common  stock 
was  to  be  put  upon  a  dividend  basis?  Or  when  Union  Pacific 
was  to  increase  its  dividend  to  10%  ?  Or  when  Amalgamated 
Copper  would  reduce  or  pass  its  dividend?  Or  when  and  on 
what  basis  it  would  resume  dividends?  The  determination 
of  these  questions  generally  rests  with  one  or  at  most  a  few 
men  in  each  Company.  It  was  natural  that  they  should  make 
use  of  their  advance  knowledge  so  long  as  there  was  no  law 
or  public  sentiment  to  restrain  them.  But  the  temptation 
to  force  dividends  and  to  suspend  dividends  and  otherwise 
to  use  their  vast  power  are  too  great.  They  must  be  removed 
if  we  are  ever  to  have  honest  corporate  management. 

It  may  be  that  under  the  new  order  of  things  we  shall 
not  have  the  same  class  of  men  in  our  boards  of  Directors. 
That  is  probably  true.  The  incentives  will  no  longer  be 
there.  They  were  dishonest  incentives  but  strange  to  say  it 
was  not  considered  dishonest  for  a  Trustee  to  exploit  his 
shareholders.  It  was  considered  rather  clever  even  to  the 
point  of  selling  the  stock  of  his  own  Company  ''short"  and 
shaking  out  his  shareholders. 

It  should  be  made  impossible  for  the  men  who  are  in  con- 
trol of  these  vast  enterprises  to  go  on  fleecing  the  public.  It 
is  high  time  that  they  were  brought  to  realize  that  they  are 
Trustees  for  their  shareholders. 

In  no  other  country  are  such  practices  tolerated. 

Subsection  (i)  of  Section  1  of  the  Bill  is  intended  to  put 
a  stop  to  the  use  by  directors  of  inside  information  as  a 
basis  for  speculation.  There  is  no  reason  why  a  director 
should  secretly  trade  in  the  securities  of  his  Company  nor 


n 


54 


IP 


ifr 


should  it  be  possible  further  to  use  the  mails  to  promote  such 
exploitation. 

As  illustrating  the  insincerity  of  the  proposed  Bill  re- 
quiring incorporation  to  which  I  have  referred  as  having 
been  defeated  in  the  last  New  York  Legislature,  I  call  atten- 
tion to  the  fact  that  the  Bill  empowered  the  Superintendent 
of  Banks  to  examine  the  books  of  the  Exchange,  but  not  the 
books  of  its  members.  As  the  Exchange  claims  that  it  con- 
ducts no  business  and  keeps  no  books,  that  was  rather  an 
emi)ty  formality.  What  is  needed  is  the  power  to  examine 
the  books  of  the  members.  Without  that  power  no  law 
against  manipulation  is  of  the  slightest  avail. 

The  Governors  of  the  Stock  Exchange  now  have  that 
power  and  exercise  it  summarily.  Are  public  officials 
less  entitled  to  be  trusted!  Few  brokers  would  dare  take 
the  risk  of  conviction  if  their  books  were  made  subject  to 
inspection.  The  law  against  railroad  rebates  would  be  a 
dead  letter  unless  the  Commission  had  power  to  examine 
the  books  of  the  railroad  companies.  The  same  is  true  as  to 
the  members  of  the  Exchange  to  discover  manipulation. 
Nothing  short  of  that  will  ever  do  so.  As  matters  now  stand 
there  is  not  the  slightest  peril  in  such  transactions. 

Another  of  the  many  abuses  exposed  by  the  inquiry  of  the 
Pujo  Committee,  which  the  Exchange  claims  has  been  cor- 
rected by  the  New  York  State  legislation  of  1913  is  that  of 
the  hypothecation  by  brokers  of  the  securities  belonging  to 
their  customers  for  loans  to  the  brokers  in  excess  of  the 
amount  owing  by  the  customer  to  the  broker.  As  the  result 
of  this  practice,  whenever  the  broker  became  insolvent  the 
customer  lost  his  stock  through  its  sale  by  the  creditor  of 
the  broker.  The  customer  may  owe  50%  of  the  value  and 
the  broker  may  have  borrowed  80%  or  90%  of  such  value. 
The  law  of  1913  pretends  to,  but  does  not  correct  this  flagrant- 
ly dishonest  practice  which  the  Exchange  has  permitted  to  go 
unchecked  all  these  years. 

In  other  States  where  there  has  been  no  attempt  at  legis- 
lation following  these  exposures  the  Stock  Exchanges  continue 
to  tolerate  this  form  of  fraud  without  even  the  modification 
that  has  been  introduced  in  the  New  York  Exchange. 

The  New  York  broker  now  goes  through  the  formality  of 
requiring  from  his  customer  at  the  inception  of  their  dealings 


55 


i 


an  omnibus  consent  applicable  to  all  transactions  to  the  use  of 
his  (the  customer's)  securities  for  an  amount  greater  than  is 
owing  the  broker  by  the  customer.  This  has  little  less  justifica- 
tion than  the  other.  Why  should  the  broker  be  permitted  to  ex- 
act the  right  to  do  business  on  the  capital  of  his  customers  ?  Is 
it  any  wonder  that  one-third  of  all  the  transactions  on  the  Ex- 
change are  for  the  broker's  own  account!  One  of  the  most 
effective  means  of  checking  the  worst  form  of  speculation  is 
to  prohibit  this  practice. 

Still  another  remedy  will  be  to  require  every  pur- 
chase and  sale  to  be  delivered  or  ** cleared"  through 
the  Stock  Exchange  Clearing  House,  as  checks  are  now 
cleared  in  the  various  Clearing  House  Associations  instead 
of  permitting  a  mere  delivery  of  balances  as  is  now  the 
rule  in  the  Stock  Exchange  Clearing  House.  Still  another 
remedy  will  be  to  require  that  at  the  time  of  purchase  the 
broker  be  paid  20%  of  the  then  purchase  price.  It  would  not 
be  necessary  to  keep  good  any  such  margin.  Its  requirement 
at  the  beginning  would  be  a  wholesome  deterrent  against  the 
worst  form  of  gambling — by  those  who  can  least  afford  it 
and  who  are  always  the  surest  victims. 

The  Exchange  takes  unto  itself  credit  for  the  recent  rule 
forbidding  its  members  to  accept  the  accounts  of  clerks  of 
banks  and  trust  companies  but  it  does  not  extend  the  rule 
to  the  officers  of  those  institutions.  The  defalcations  from 
stock  gambling  by  clerks  are  negligible  compared  with  those 
of  the  officers  of  corporations. 

Still  another  rule  of  the  Exchange  quite  as  reprehensible 
as  any  that  were  exposed  and  quite  as  repugnant  to  the  sense 
of  justice  is  that  which  assures  to  all  the  members  of  the  Ex- 
change a  preference  against  the  estate  of  a  bankrupt  mem- 
ber for  all  debts  owing  such  member  to  the  full  extent  of  the 
value  of  the  membership  seat  over  the  claims  of  the  vic- 
timized customers  of  such  bankrupt.  It  often  happens  in 
such  cases  that  the  **seat,"  which  is  worth  from  $40,000  to 
$100,000 — dependent  on  the  activity  of  speculation — is  the 
only  valuable  asset  of  the  bankrupt.  Every  dollar  of  that 
money  is  applied  toward  paying  the  creditor-members  in  full 
to  the  exclusion  of  the  outside  creditors.  If  the  broker  has 
re-hypothecated  your  securities  for  twice  what  you  owe  him 
and  they  have  been  swept  away  you  get  nothing  except  your 
share  of  what  is  left  after  the  members  of  the  Exchange  have 
been  fully  paid. 


56 


Such  a  condition  would  not  be  permitted  to  survive  in- 
corporation and  regulation. 

This  rule  is  defended  as  essential  to  the  present  system 
under  which  the  members  accept  one  anothers '  obligations  for 
large  sums.  The  defense  appears  to  me  most  inadequate. 
What  becomes  of  the  much-prized  code  of  honor  of  which  the 
members  are  so  proud  if  it  must  be  fortified  by  a  preference 
over  other  creditors?  There  is  a  fine  spirit  of  commercial 
honor  among  the  members  that  is  unique  and  that  makes  it 
possible  for  them  to  conduct  large  transactions  in  the  heat 
of  excitement  by  mere  word  of  mouth  with  amazing  smooth- 
ness ard  freedom  from  repudiation  or  controversy  and  which 
should  render  this  injustice  to  their  customers  unnecessary. 
It  should  be  made  impossible. 

To  leave  the  disciplining  of  members  for  manipula- 
tion in  the  hands  of  the  Stock  Exchange  Governors,  with- 
out the  right  of  judicial  review  would  be  like  relegating  to  the 
Association  of  Railway  Presidents  the  punishment  of  one  an- 
other for  granting  rebates.  Or  to  an  Association  of  the 
Presidents  of  the  Trusts  the  power  to  determine  violations  of 
the  Anti-Trust  Law  and  to  inflict  punishment.  In  what  other 
department  of  the  administration  of  justice  is  the  punishment 
of  crimes  left  with  the  colleagues  of  those  who  are  charged 
with  the  commission  of  such  crimes!  Yet  it  is  now  seriously 
proposed  that  whilst  the  evidences  of  these  crimes  shall  be 
available  to  the  Governors  of  the  Exchange  (as  it  now  is  under 
its  rules),  so  that  they  may  inflict  punishment,  such  evidence 
shall  not  be  made  available  to  the  public  authorities ! 

2.  The  second  important  result  to  be  gained  by  incorpo- 
ration will  be  to  secure  complete  publicity  of  the  profits  of 
hankers,  brokers  and  intermediaries  in  the  flotation  of  Com- 
panies and  the  exposure  of  all  the  salaries,  commissions  and 
other  profits  of  officers  and  Directors,  through  the  control  of 
the  Department  of  the  Exchange  for  the  listing  of  securities, 
to  enforce  the  listing  of  proper  securities,  and  to  prevent 
those  that  have  once  been  listed  from  being  stricken  from  the 
list  without  notice  and  the  right  of  review. 

Bonds  of  the  City  of  New  York  were  recently  refused  a 
listing  because  they  were  engraved  by  a  company  that  was  in 
litigation  with  the  Exchange  over  the  refusal  to  list  securities 
engraved  by  that  Company. 

Listing  on  the  New  York  Stock  Exchange  gives  to  a  se- 
curity a  public  market  and  a  definite  current  value,  rendering 


h 


57 


it  salable  and  available  as  collateral.  Securities  are  not  gen- 
erally available  as  collateral  for  Stock-Exchange  loans  unless 
they  are  listed. 

The  Constitution  of  the  New  York  Exchange  provides 
that  the  Committee  on  Stock  List 

shall  have  power  to  direct  that  any  such  securities  or  tern- 
porary  receipts  be  taken  from  the  list  and  further  dealings 
therein  prohibited; 

and  that  the  Governing  Committee 

'  may  suspend  dealings  in  the  securities  of  any  corporation 
previously  admitted  to  quotation  upon  the  Exchange,  or  it 
may  summarily  remove  any  securities  from  the  list. 

A  regulation  dated  March  27th,  1895,  further  provides 
that 

Whenever  it  shall  appear  to  the  Committee  on  Stock  List 
that  the  outstanding  amount  of  any  security  upon  the  Stock 
Exchange  has  become  so  reduced  as  to  make  inadvisable  fur- 
ther dealings  therein  upon  the  Exchange,  the  said  Commit- 
tee may  direct  that  such  security  shall  be  taken  from  the 
list  and  further  dealings  therein  prohibited. 

Acting  under  this  authority,  the  Governing  Committee 
and  the  Committee  on  Stock  List  have  frequently  removed 
securities  from  the  list.  Stocks  have  been  so  removed  on 
the  ground  of  an  insufficient  amount  outstanding,  simply  be- 
cause a  large  proportion  of  the  issue  has  been  absorbed  by 
some  other  corporation. 

Taking  a  security  from  the  list  is  a  serious  injury  to  the 
holders  by  depriving  them  in  large  part  of  a  market  and  mak- 
ing borrowing  upon  such  security  difficult  if  not  imj>ossible. 

Obviously,  therefore,  the  effect  of  prohibiting  further 
dealings  in  the  stock  of  a  corporation  when  the  great  bulk  of 
it  has  been  acquired  by  one  person,  group  or  corporation  is, 
whether  intentionally  or  not,  to  coerce  small  stockholders  into 
selling  out  to  the  majority  holders.    It  destroys  their  market. 

Striking  illustrations  of  the  operation  of  this  regulation 
are  not  lacking.  Thus,  on  the  reorganization  of  the  Southern 
Kailway  Company  by  J.  P.  Morgan  &  Company  a  majority 
of  its  stock  was  placed  in  a  Voting  Trust,  which  deprived  the 
stockholders  of  all  representation  and  voting  powers  and  vest- 
ed the  absolute  control  of  the  Company  in  the  Trustees — J.  P. 
Morgan,  George  F.  Baker  and  Charles  Lanier,  who,  upon  the 
transfer  of  the  stock  into  their  names,  issued  the  usual  Trust 


^f 


58 

Certificates,  which  were  listed  and  traded  in  on  the  Exchange 
instead  of  the  stock  certificates.  When  this  Voting  Trust 
expired  in  September,  1902,  the  Trustees,  through  J.  P. 
Morgan  &  Co.,  requested  certificate-holders  to  extend  the 
Trust.  New  Trust  Certificates  were  issued  to  those  assenting 
to  the  extension  and  these  were  listed  on  the  Exchange.  In 
March,  1903,  the  old  Trust  Certificates  were  removed  from 
the  list,  although  there  were  at  that  time,  which  was  six  months 
after  Messrs.  Morgan  had  requested  the  extension  of  the 
Voting  Trust,  certificates  representing  183,938  shares  whose 
holders  were  apparently  unwilling  to  further  resign  their 
voting  powers.  The  result  was  that  those  not  assenting  to 
the  extension  of  the  Trust,  and  hence  not  taking  new  Trust 
Certificates,  found  themselves  with  a  security  not  listed  on  the 
Exchange,  and  therefore  without  a  ready  market  and  not 
available  as  collateral.  The  listing  of  the  extended  Certifi- 
cates and  the  removal  from  the  list  of  the  old  ones,  whether  so 
intended  or  not,  operated  as  a  means  of  coercing  the  holders 
of  these  183,938  shares  into  exchanging  their  old  certificates, 
in  order  to  get  a  listed  security  which  could  be  sold  or  made 
available  for  borrowing  purposes.  It  is  now  nineteen 
years  since  that  Voting  Trust  was  created,  and  it  has  not  yet 
been  dissolved. 

Again,  in  the  development  of  the  Tobacco  Trust,  a  few 
men  who  were  in  control  of  the  management  organized  a  new 
Company  known  as  the  Consolidated  Tobacco  Company,  to 
the  stock  of  which  they  alone  were  permitted  to  subscribe. 
The  then  outstanding  stocks  of  the  American  Tobacco  Co. 
and  the  Continental  Tobacco  Co.  were  earning  such  large 
dividends  and  the  prospects  were  so  alluring  that  the  insid- 
ers conceived  the  scheme  of  taking  the  equities  in  these  com- 
panies unto  themselves  by  the  organization  of  this  new 
Company  which  was  to  acquire  the  outstanding  stocks  by 
issuing  in  payment  for  them  4%  bonds  of  the  new  company 
charged  upon  the  stocks  thus  acquired  at  the  rate  of  200  in 
bonds  for  each  $100.  share  of  American  Co.  stock  and  par 
for  par  for  each  Continental  Co.  share.  The  insiders  thus 
acquired  the  vast  equities  in  these  companies  without  pay- 
ing any  cash  except  that  they  nominally  paid  in  25  per  cent, 
of  the  $30,000,000  capital  (which  they  shortly  thereafter  re- 
paid themselves  in  the  form  of  a  dividend).  The  bonds  had  no 
security  behind  them  other  than  the  stock  that  was  being  re- 


59 


M 


ceived  in  exchange,  and  the  subscriptions  to  the  stock  of  the 
Consolidated  Company, 

It  was  one  of  the  most  remarkable  coups  ever  consummat- 
ed in  the  world  of  high  finance  and  is  said  to  have  netted 
many  millions  to  the  inventors  of  the  scheme  but  at 
the  expense  of  the  shareholders.  The  exchange  of  the 
old  stocks  for  the  new  bonds  having  proceeded  until  the  Con- 
solidated Company  had  acquired  all  but  11,357  shares  of  the 
common  stock  of  the  old  American  Tobacco  Company,  the 
Tobacco  stock  was  removed  from  the  list  and  in  its  place  the 
new  convertible  bonds  of  the  Consolidated  Co.  were  listed 
without  notice  to  the  holders  of  the  outstanding  11,357  shares 
of  the  Tobacco  Co. 

It  is  admitted  by  the  Governors  of  the  Exchange  that  the 
effect  of  this  action  might  be  to  further  the  schemes  of  the 
promoters  of  this  enterprise  to  take  from  the  stockholders 
their  equity  and  transfer  that  equity  into  the  pockets  of  the 
promoters.  When  that  stock  was  stricken  from  the  list  it 
ceased  to  be  readily  available  as  collateral,  as  it  had  lost  its 
market  quotation.  Its  best  market  thereafter  was  manifestly 
among  the  insiders,  who  understood  its  intrinsic  value. 

One  of  the  most  striking  instances  of  the  oppression  of 
minority  stockholders  from  the  operation  of  this  rule  came 
to  light  through  the  questions  put  by  a  member  of  the  Com- 
mittee. It  was  in  connection  with  the  striking  from  the  list 
of  the  stock  of  the  Kanawha  &  Michigan  Eailway  Company 
of  Ohio,  which  occurred  in  1910  but  which  I  had  erroneously 
placed  from  memory  as  having  occurred  some  years  earlier. 
Although  concerned  in  the  transaction  the  details  had  entire- 
ly escaped  my  recollection. 

It  appears  that  the  road  had  at  one  time  been  a  pros- 
perous, independent  property  but  had,  contrary  to  the  Anti- 
Trust  Law,  come  under  the  control  of  the  Hocking  Valley, 
which  was  a  parallel  and  competing  line,  where  it  remained 
for  many  years.  This  control  was  represented  by  a  barq 
majority  of  less  than  51%  or  $4,510,000  of  the  then  outstand- 
ing capital  of  $9,000,000. 

During  all  the  years  that  it  was  under  such  control  it 
eked  out  a  precarious  existence,  whilst  the  controlling  road 
developed  great  prosperity  and  earned  large  dividends  at 
its  expense.  The  stock  had  been  selling  around  $40.  per 
share.  The  minority  began  agitating  for  a  change  in  this  in- 
tolerable condition  and  in  1909  the  Hocking  interests,  under 


J 


60 

pressure  from  the  minority,  made  an  offer  of  $72.  per  share 
for  the  outstanding  stock.  What  amount,  if  any,  had  been 
meantime  acquired  by  the  controlling  interests  in  the  market 
at  lower  prices  does  not  appear. 

Most  of  the  minority  holders,  worn  out  by  the  delays  and 
disappointments  of  years  and  unwilling  to  incur  the  expense 
and  uncertainty  of  litigation  to  protect  their  rights,  accepted 
the  offer. 

Others,  controlling  about  3300  (not  6800  as  I  supposed) 
shares,  some  of  whom  had  owned  the  stock  for  15  or  20  years 
and  whom  it  had  cost  with  interest  between  $200  and  $300 
per  share,  refused  to  be  driven  into  accepting  the  Hocking 
terms.  A  Protective  Committee  was  formed  and  suits  were 
begun  in  the  Ohio  Courts  to  compel  the  Hocking  to  release 
its  illegal  and  destructive  grip  on  the -road  and  to  account 
to  the  Comapny  for  the  lossess  sustained  during  the  many 
years  of  control  by  the  Hocking. 

Whilst  this  litigation  was  pending  the  stock,  which  had 
been  for  20  years  a  listed  security,  was  stricken  from  the 
list,  without  notice  or  warning,  under  the  statement,  as  after- 
wards appeared,  that  there  were  in  all  only  2,000  or  2,200 
shares  outstanding. 

The  undoubted  purpose  of  that  action  was  to  discourage 
the  litigants  by  destroying  the  market  for  their  stock  and 
rendering  it  unavailable  as  collateral. 

^  After  costly  litigation  the  stock  represented  by  the  Com- 
mittee was  sold  to  the  controlling  interests  at  $165.  per 
share.  With  an  operating  mileage  of  over  187.  miles  in  the 
heart  of  one  of  the  richest  parts  of  the  country,  an  exception- 
ally strategic  position,  a  bonded  debt  of  only  $4,969,000  or 
at  the  rate  of  less  than  $30,000  per  mile,  a  capital  of  only 
$9,000,000  or  at  the  rate  of  only  $50,000  per  mile,  and  admitted 
earnings  as  shown  below,  the  price  paid  does  not  by  any 
means  represent  the  intrinsic  value  of  the  stock,  but  the 
prospects  of  endless  lawsuits  against  these  powerful  inter- 
ests, with  the  endless  delays  and  enormous  expenditures 
involved,  were  not  alluring. 

Fortunately  the  Government  almost  immediately  took  up 
the  fight  and  the  control  was  changed. 

Now  mark  what  happened:  I  quote  from  Moody's  Man- 
ual of  Railroads  and  Corporation  Securities,  which  is  recog- 
nized as  the  standard  work  on  railroads,  for  1914,   (pp 
600-602) : 


61 


The  Lake  Shore  &  Michigan  Southern  Ky.  and  the  Chesa- 
peake &  Ohio  Ry.  Companies  early  in  1910  acquired  $4,- 
510,000  of  this  company's  stock  and  up  to  June  30,  1913,  had 
purchased  35,484  additional  shares  from  the  minority  stock- 
holders, making  a  total  of  $8,058,400  of  the  stock  held  by  the 
Lake  Shore  and  Chesapeake  &  Ohio  companies,  as  of  that 

date. 

(p.  GOO.) 

According  to  this  statement  there  are  still  9,416  shares 
outstanding.  And  yet  the  stock  was  stricken  from  the  list 
on  the  unsupported  assertion  that  there  were  then  only  2,000 
or  2,200  shares  outstanding. 

Note  further  what  happened  to  the  stock  that  had  not  paid 
a  dividend  during  all  the  years  of  the  Hocking  control,  after 
this  $3,548,400  of  minority  stock  was  sequeezed  out  of  the 
hands  of  its  owners  at  the  price  the  majority  interests  chose 
to  put  upon  it  (Moody's  Manual  p.  600) : 

Dividends.— Imiml  dividend  of  4%  paid  June  30,  1911: 
21/2%  each  paid  Dec.  30,  1911,  June  30,  1912  and  Dec.  30, 
1912;  21/2%  and  1%  extra  June  30,  1913;  Sept.  30,  1913, 
114%;  Dec.  29,  1913,  114%.  Dividends  payable  quarterly 
M.  J.  S.  D.  30  at  J.  P.  Morgan  &  Co.,  New  York. 

(p.  600.) 

For  the  fiscal  year  ended  June  30,  1913,  the  total  net  in- 
come available  for  dividends  on  the  stock,  after  paj^ment  of 
all  fixed  charges,  amounted  to  about  $5,172  per  mile  and 
the  present  dividend  of  $5.00  per  share  on  the  stock  re- 
quires $2,556  per  mile.  Therefore  about  $11.16  per  share 
was  earned  with  which  to  pay  the  5%   dividends  on  the 

stock. 

(p.  602.) 

Moody's  report  also  contain^  this  statement: 

The  increase  in  train  load  tons  tells  the  story  and  it  is 
my  opinion  that  earnings  are  being  concealed  and  that  some 
day  will  suddenly  become  evident. 

(p.  603.) 

It  will  be  observed  that  almost  immediately  after  the  Hock- 
ing took  its  grip  off  the  property  and  after  the  insiders  had 
bought  out  the  minority  interest  of  over  48%,  the  road  began 
to  show  large  earnings  and  is  now  showing  over  11%  per 
year,  besides  the  concealed  earnings  referred  to  in  Moody's. 

In  Moody's  of  1911,  its  financial  railroad  expert  includes 
the  following  statement  in  his  report  of  May  8th,  1911 : 

The  marked  change  in  net  earnings  for  1910  compared 
with  the  previous  year  is  a  very  good  illustration  of  how 
the  earnings  of  such  controlled  roads  are  subject  to  manipu- 


li 


J 


62 

lation' by  the  arbitrary  diverting  of  traffic  to  or  from  the 
property.  This  is  one  reason  why  I  do  not  recommend  the 
purchase  of  minority  stocks,  although  the  possibility  of  prof- 
it IS  sometimes  great.  j       f  ^^■ 

In  the  face  of  this  state  of  facts  it  was  intimated  by  the 
questions  put  at  the  hearing  that  in  selling  the  stock  repre, 
sented  by  them  at  $165.  per  share  the  Protective  Committee 
had  practically  "held  up"  the  confiding  and  unprotected  ma- 
Dority  interests  in  the  Kanawha,  knowing  that  the  latter  was 
required  by  some  law  or  rule  or  for  some  purpose,  that  was 
not  stated  or  suggested,  to  acquire  all  the  outstanding  stock. 
I  hat  there  was  no  basis  for  this  assumption  is  evident  (1) 
from  the  fact  that  the  Protective  Committee  did  not  control 
all  the  outstanding  stock  and  that  there  are  9,416  shares  of 
It  apparently  still  outstanding  and  (2)  that  the  Protective 
Committee's  charges  of  oppression  on  the  part  of  the  major- 
ity are  amply  justified  by  the  present  disclosed  earnings  of 
oyer  11%   besides  the  supposedly  concealed  earnings     In 
view  of  these  disclosures  it  would  be  interesting  to  know  where 
in  the  judgment  of  your  Committee  the  "hold  up"  occurred 
Was  It  on  the  part  of  the  minority  stockholders  who  had 
been  kept  out  of  the  fruits  of  their  investment  and  who  finally 
accepted  a  fraction  of  the  value  of  their  stock?    Or  was  it  on 
the  part  of  the  insiders  who  forced  and  kept  down  the  value 
of  the  stock  and  had  it  stricken  from  the  list  until  they  suc- 
ceeded in  "gathering  in"  over  80%  of  the  outstanding  mi- 
nority interest  on  their  own  terms  T 

The  holders  of  this  stock,  as  did  the  holders  of  Southern 
Kailway  securities  and  of  a  number  of  others  that  have  been 
stricken  from  the  list,  presumably  made  their  purchases  while 
the  securities  were  listed.  They  did  nothing  to  forfeit  their 
right  to  have  them  remain  on  the  list  and  thereby  keep  the 
market  they  had  when  they  acquired  their  holdings  Yet 
without  reason  or  notice  the  holders  find  themselves  confront- 
ed with  the  alternative  of  seUing  at  a  price  fixed  by  the  pur- 
chaser or  having  their  market  destroyed. 

The  rule  authorizing  the  removal  of  a  stock  from  the 
list  is  defended  on  the  ground  that  where  all  but  a  small 
proportion  of  an  issue  is  held  in  a  single  control  it  is  easier 
to  manipulate  the  price  of  it  and  create  a  corner  in  it.  This 
contention  when  analyzed  amounts  to  the  assertion  that  an 
investor  who  bought  his  stock  relying  upon  its  being  a  listed 
security  must  be  penalized  in  order  to  protect  a  speculator 


f 


63 

who  may  sell  stock  that  he  does  not  own  and  is  unable  to  buy 
it  to  make  delivery.  No  one  who  owns  what  he  is  selling  is 
in  danger  of  a  ** corner.'' 

Why  should  not  the  Stock  Exchange  be  prevented  from 
lending  itself  to  such  schemes?'  Why  should  there  not 
be  supervision  and  the  right  of  review  of  these  public 
functions  of  listing  stocks  and  removing  them  from  the  list? 
What  argument  can  be  advanced  for  permitting  this  auto- 
cratic, irresponsible  and  unreviewable  power,  so  long  abused 
and  made  the  creature  and  football  of  high  finance,  to  con- 
tinue? Judicial  review  can  never  work  injustice.  If  the  ac- 
tion is  supported  by  reason  or  by  so  much  as  a  decent  pre- 
text it  will  be  sustained.  If  not  it  should  be  and  will  be  over- 
ruled. 

There  is  much  more  that  can  and  should  be  said  in  favor 
of  the  necessity  of  this  Bill  as  a  reformatory  and  constructive 
measure  but  I  have  already  trespassed  too  long  upon  your 
patience.  I  again  ask  you  in  conclusion  to  study  the  Report  of 
the  Pujo  Committee  on  this  subject  and  the  diagrams  and  sta- 
tistics on  which  it  is  based  if  you  want  fully  to  realize  some- 
thing of  the  extent  to  which  the  masters  of  high  finance 
have  preyed  upon  the  people  through  the  machinery  of  the 
Stock  Exchange  and  how  the  rules  of  the  game  have  been  so 
framed  and  the  delicate  mechanism  so  adjusted  as  to  play, 
often  unconsciously,  into  their  hands. 

Through  the  incorporation  of  the  Stock  Exchange  there 
is  offered  an  opportunity  to  end  this  carnival  of  exploita- 
tion. The  Exchange  should  be  made  the  most  powerful 
weapon  for  enforced  publicity  of  corporate  affairs  and  its 
business  should  be  augmented  many  times  over  whilst  at  the 
same  time  it  would  be  performing  the  highest  order  of  public 
service. 

The  fact  that  this  incongruous  form  of  irresponsible  gov- 
ernment of  the  greatest  of  our  national  agencies  of  finance  has 
been  tolerated  all  these  years  furnishes  no  reason  whv  it 
should  longer  continue.  It  demonstrates  the  dangerous  power 
that  the  financial  interests  have  wielded  over  governmental 
agencies.  We  have , riot  ipjei  begun.'ttf -lindeT^tand  the  potency 
of  this  unrestrained  power  khd  have  therefore  been  con- 
tent to  be  led  by  specious  •  a rgutfjenfe"  ,ik)  leave  undone 
some  of  the  most  important  functions  of  g6vernment.    It  is 


■•  / 


V 


I 


t  r 


64 


high  time  that  we  direct  our  attention  to  this  and  like  import- 
ant branches  of  regulation. 

Pray  do  not  misunderstand  me.  I  have  not  intended  in 
anything  I  have  said  to  reflect  upon  the  integrity  of  the  mem- 
bership of  the  New  York  Stock  Exchange,  taken  in  its  en- 
tirety. 

Judged  by  the  standards  of  the  past  I  venture  to  assert 
that  there  is  no  body  of  men  in  the  country  with  a  greater 
respect  for  their  obligations.  But  happily  our  standards 
are  improving.  Methods  that  were  considered  legitimate 
ten  years  ago  and  that  are  still  practiced  in  many  quar- 
ters of  the  financial  world  are  now  seen  to  be  intolerable. 
Others,  such  as  the  dealings  of  oflScers  and  directors  with 
their  corporations  that  are  still  permitted,  will  soon  be  defined 
as  crimes,  as  they  are  in  other  countries.  It  will  not,  for  in- 
stance, be  long  before  bank  officers  and  directors  will  be 
prohibited  from  exploiting  their  banks  and  other  corporate 
officers  will  be  prevented  from  withholding  information  and 
speculating  on  advance  knowledge. 

In  judging,  however,  the  point  of  view  of  the  members 
of  the  Exchange  we  must  remember  how  difficult  it  is 
for  one  to  adjust  his  perspective  to  changed  conditions  and 
public  sentiment  that  conflict  with  self-interest  and  long  con- 
tinued license.  All  of  our  judgments  are  apt  to  be  warped 
where  self-interest  obstructs  our  vision.  But  the  strange  part 
of  it  all  is  that  these  gentlemen  are  not  only  blind  to  the 
possibility  of  infirmity  in  their  judgments  as  to  the  necessity 
for  Governmental  control,  but  are  not  even  willing  to  accord 
to  the  critics  of  their  methods  the  common  justice  of  good 
faith  and  honest  public-spirited  motives  in  maintaining  a 
different  point  of  view.  They  simply  cannot  understand  that 
point  of  view. 

I  am  convinced  that  the  time  will  come,  and  before  long, 
after  incorporation  and  regulation  have  been  enforced  when 
those  who  are  now  bitterly  assailing  the  champions  of  this 
legislation  in  the  vain  hope  of  thereby  diverting  the  issue 
will  find  that  it  has  marked  the  dawn  of  a  new  era  of  useful- 
ness and  prosperity  for  them  and  the  Exchange  and  will  feel 
grateful  to  those  who  have  pointed  the  way. 

Respectfully  submitted, 

Samuel  Untermyer, 
►  in  support  of  Bill, 


tfHH  osu&o 


•m  I  ^ujj 


If 


COLUMBIA  UNIVERS  TY 


III 


0044244851 


LIBRARIES 


SEP  16  1940 


END  OF 
TITLE 


